Andy Xie: Inflation exported from the US will come back to haunt it

In an interview on Bloomberg, Andy Xie explains how US stimulus is causing inflation in emerging markets and how this will be re-exported back to the US via higher commodity prices.

Stimulus is prescribed as a panacea for recession. In today’s global economy, it isn’t effective in the best of circumstances and is outright wrong for what ails the West now.

Trade and foreign direct investment total half of global gross domestic product. Multinational corporations drive both. They shop around the world for the lowest-cost production centers and ship goods to wherever the demand is. Demand and supply are dislocated. So when a government introduces stimulus, the initial increase in demand doesn’t necessarily boost local supply. More importantly, if multinationals decide to invest somewhere else, there wouldn’t be an increase in jobs to sustain the growth in demand beyond the stimulus.

Before you scream traitors, please bear in mind it’s only natural that capital seeks growth, real growth that comes from either productivity or population growth. And within the developed economies, both are in short supply. Japan’s stagnation is NOT due to any policy failure or “stimulus not big enough”, but rather because it has seen both peak productivity and declining population.

Just as water flows down, stimulus affects low-cost economies more, wherever it is initiated. As the West pours money into the global economy through large fiscal deficits or central banks expanding balance sheets, the emerging economies are drowning in excess liquidity. Everything is turning red-hot.

These words are so true. I have blogged about wage increases in all kind of places before.

However, he then went on to explain how unemployment will not be able to check this imported inflation, and here’s where I disagree with him. While I do believe in imported inflation for the matured economies, I don’t think the workers in these economies are in a position to bargain for wage increases. Instead, inflation will have a double whammy on the average Joes as their assets prices and wages keep falling while everyday living expenses increase. The only spin you can put on this nightmarish scenario is that being squeezed on both sides, the painful adjustment will be quicker, or as Xie put:

The West must wait for the Wangs and the Gandhis to become rich enough so that they demand Western wages and spend like the Smiths and Gonzalezes.

It is a long and painful process for the West. And there is no way around it.

Is more money coming for the credit junkie?

Even though imports slowed drastically and inflation has busted the 3% target, some people at least can breath a little easier. Yes, I’m talking about the credit junkies, and they are making their cries for more stimulus heard. From Bloomberg:

“Policy makers may have more room to sustain growth if needed,” said Sun Chi, a Hong Kong-based economist at Nomura, who previously worked for the U.S. Treasury in Beijing. “The lending quota could be loosened to sustain ongoing investment projects.”

This is largely based on expectation that inflation is peaking and, dare I say it, the economy is weakening.

On the first factor, I think it’s still too early to call inflation peaking. Food has been a major driver behind inflation this year, with no sign of abating so far. And there has been a persistent rumor lately that China has purchased 600k metric tonnes of rice from Vietnam, mind you, the nation imported only 174k metric tonnes in H1/2010. So this could point to a severe shortage of rice in the market. Is this rumor true? I don’t know. But it’s at least credible enough for a Vietnamese minister to come out to assure his people of food security.

Besides persistent worries on inflation, the asset bubble is another cause of concern for China. Considering that the bank regulator has ordered the banks to consolidate off-balance sheet items on Monday and clamp down on their credit card activities today, plus the PBoC has drained an estimated RMB187bn from the banking system with its open market operations in three weeks, the fix is not coming, at least not yet.

Chinese slowdown is here to stay

The HSBC China PMI fell to 49.4 in July, showing a contraction in the economy. Although the government’s PMI for July was reported at 51.2, and still expanding, this distinction is largely superfluous as the deceleration is obvious from both accounts. The government’s survey differs from that of HSBC in that it focuses more on large and state-owned companies.

The economic slowdown, though expected, still buoyed the Chinese and regional markets. Are their hopes for new stimulus justified? I would think no.

The side effects from the first try are still very pronounced in China. CCTV, China’s state-owned television station and not exactly known for exposing the darker underbelly of the nation, ran a program recently about a “ghost city” in Tianjin, housing developments that are largely vacant due to speculative demand. Inflation on foodstuffs is over 10%. Contrary to popular belief, the 1989 Tiananmen Square protest was really driven by runaway inflation. So the CCP, mindful of their “mandate of heaven”, will most likely stay on the cautious side and refrain from having another puff of addictive stimulus.

Stimulus rumor mill

The world must be really desperate and addicted  to artificial highs that a low quality rumor from a tiny website would be picked by by Bloomberg.

China will announce in August a new stimulus package of possibly 4 trillion yuan ($586 billion), the China Business newspaper reported on its Web site, citing unidentified sources.

I have no idea where the 4 trillion figure comes from, but the proposal itself most likely is just part of China’s 12th five-year plan. (Yes, China still has those as befit a command economy, you know)

In its effort to move up the value chain and rebalance economy, China has adopted explicit industrial policies to promote “new technologies” like new energy, IT,  life science etc. And unlike Obama’s new energy initiatives, Chinese ones actually come with substantial investments as well. This August plan is just fleshing out guidelines announced with the 12th 5-yr plan, i.e. the money to be spent has already been budgeted and will be paid out entirely by the Treasury.

Bottom line: No New Money.