Inflation: What if, What Else, & What Are the Odds – Results

Wednesday, January 30, 2008 20:06
Posted in category The Big Picture
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A couple of weeks ago, I announced that our second What if, What Else & What are the odds meeting would take place, and that we would discuss inflation. Well, tonight was the night, and for nearly 3 hours we debated the issue of inflation.

Who was “we”? Well, “we” were 5 in total, and represented a span of groups from big 4 to web 2.0… and while I was the only tie between the 5, would say that it took no time at all for a common ground to be found and the fun to begin.

As a starting point, I was hoping to cover the following questions:

  • What is the current real inflation rate?
  • Is inflation likely to increase or decrease over the next 6 months? 12 months? 24 months?
  • What impact will inflation have and who will be impacted the most?
  • Can the central party continue to hold prices at current levels? Should they?
  • What impact will/ could inflation have on foreign operations in China?
  • What is the best way to hedge/ take advantage of a period of high inflation?

and of course, while we strayed off course often (the venue did serve alcohol), we were able to answer 5 of the 6 above.. and then some. so, true to my word here are some of my notes from the evening. I will be sending out a complete set to those who responded on the previous post – but I gotta say, the majority of people use anon or ridiculously fake email addresses…

Click see more for the notes.

The general consensus of participating members was that the recent move by the government to hold pricing could potentially becoming a destabilizing policy as inefficiencies would present themselves in the market

Root causes of inflation:

  • The full extent of the causes is still unknown at this time
  • Question as to core/ non-core and impact/ consideration of asset prices in predictions
  • Inputs have increased (logistics costs, pork, biofuel, oil, etc)
  • Liquidity in market from trade surplus, and the sterilization of currency
  • RMB valuation

Currently inflation numbers are underreported

  • Concerns about pork and other staples exist
  • Root causes of inflation (water, feed, disease, etc) are not fully known

How long will price freeze last?

  • Started Jan 6
  • Definitely last through the Chinese New year

What happens when price controls are removed?

  • Logic dictates that prices will hike immediately
  • A Short term price spike could subside as demand would fall, however it depends on duration of hold and inventories being held

Alternatives to the price controls

  • Free float price and let market adjust
  • Strip liquidity out of the market (increase interest rates)
  • Subsidize suppliers

China could continue to manage inflation with pr1ce controls

Effect of US recession:

  • US Situation is starting to filter back to China
  • If US slows down, then it could act as deflationary force for China through reduced demand of export products
  • Different recession depth levels in US will have different impacts
  • China is beginning to export inflation
  • May result in some overcapacity issues

How much is China dependent on China? Can EU Pickup US growth?

Interest rates have already increase 100bp in last 6 months, potentially more…

  • With US 75 basis down, that is 275 bp spread
  • Is 200 enough? Or does inflation dictate a higher interest rate is required to rein in?
    • 12%? 15% higher?
  • Administrative measures are more important though

Foreign firms:

  • Cheap China is gone:
    • Labor cost going up
    • Credit tightening
    • SAFE is tough to get money through
  • Export platforms are not as sustainable as before – firms are reducing margins

Balancing Act:

  • China’s dynamic allow for little room for error
  • Risk of flare ups is increasing
  • Key to success/ sustainability will be for China to use this time to strengthen and shore up
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