China: A Headache of an Inflation

Reuters featured this news report on inflation on wages on 23 January 2010. Makes one interesting reading. I guess the poor people are feeling the same here in Malaysia. Do you think any one will care for you. There is a saying in Teochew;"Everyone Take Care of Themselves!"

Let us read on.

"Wang Zihua’s last pay rise was two years ago and the 56-year-old post office worker in the northern Chinese city of Harbin is concerned his 1,200 yuan monthly salary is being eaten away by rising prices.

Chinese inflation remains tame, but prices have been creeping up in the past few months and policymakers may not only have to step up their rhetoric but also the pace of monetary tightening to prevent Wang’s fears from becoming a reality.

“I really worry that prices may rise more quickly in the future, especially for rice, meat and vegetables. After all, we can skip buying things like clothing and entertainment, but we can’t skip food,” Wang said.

Inflation picked up to 1.9 per cent in December, its highest in 13 months, though still low by international standards.

Some economists have dismissed the rise as a result of volatile food prices and bad weather, but these factors could profoundly affect consumer and corporate behavior, in turn determining how fast prices may rise over the next few months.

China’s central bank has been trying to fulfill its promise to manage inflation expectations this year by cracking down on speculation in the property market, curbing rampant loan growth, guiding market rates higher and lifting bank reserve requirements. However, double-digit economic growth in the fourth quarter of 2009, accelerating consumer price rises, and surging exports all shorten the odds that the central bank will go farther and raise interest rates perhaps as early as this quarter.

“It’s safe to say that this will only increase inflationary expectations, and inflationary expectations can be self-fulfilling. So there’s no point for them to wait,” Qu Hongbin, chief China economist with HSBC in Hong Kong, said of Thursday’s batch of strong economic data.

In fact, food prices have already risen by more than 5 per cent in the year to December and with food accounting for a third of the consumer price basket, China is particularly vulnerable to food price shocks.

In 2008, food prices spiked more than 14 per cent after pig stocks were decimated by the blue-ear disease, driving overall prices 5.9 per cent higher.

What should be particularly unsettling for the People’s Bank of China is that its own survey results for the fourth quarter show an index of future price expectations outstripping another of future income confidence by the biggest margin in two years.

“If workers expect inflation to increase, they may argue for higher wages. If corporations see costs going up, they may want to raise prices,” said Wensheng Peng, chief China economist with Barclays Capital in Hong Kong.

“That channel is particularly important given what happened last year – expansion of bank credit. That in itself already generated some inflation expectations,” he said.

FALLING BEHIND?

China’s growth has led the global economic recovery, so how aggressively Beijing tightens policy is crucial for international markets.

Last week, investors pulled a net $348 million out of China-focused equity funds, the most in 18 weeks, fund tracker EPFR Global said in a report.

Whether China is too slow in responding to the inflation threat is hotly debated, though analysts agree that it faces an immense challenge.

After Chinese banks doled out a record 9.6 trillion yuan ($1,406 billion) in new loans last year, they added 1.1 trillion yuan worth of credit just in the first two weeks of January, causing the PBOC to take punitive action against some lenders.

Furthermore, with inflation creeping up, Chinese deposit rates provide only 35 basis points worth of incentive for consumers to keep their money in the bank. That might keep driving savers to equity and real estate markets in search of higher returns, confounding Beijing’s efforts to tame asset price inflation.

Managing inflation expectations is a long established facet of modern central banking. They are a useful gauge of real borrowing costs and public understanding of monetary policy.

However, measuring where people and businesses expect prices to go is more art than science in China. It lacks a market for inflation-linked securities and has few established surveys to track consumer and business views.

For now, consumer inflation is expected to be quite mild at 3 per cent this year, a Reuters poll showed on Thursday, well below the long-term trend of 6.4 per cent.

Yu Song, a Goldman Sachs economist, expects prices to rise 3.5 per cent this year – assuming the government decisively tightens policy.

He is concerned China will not adjust its exchange rate by enough to matter and exports will keep growing rapidly this year. That means the government will try to cool down domestic demand using incremental steps that may be insufficient to keep prices pressures bottled up.

“We may see inflation continuing to rise despite an apparently tightened policy stance,” Yu said in a note.

Poor Ali, Muthu and Ah Chong are feeling the same here. Does anybody really care for them?

Naw....................They are strictly following what the Teochew are advocating!

Let's have a book review. This is done by Errol Oh of the STAR.

The title invites an instant retort: “C’mon, nobody really thinks Warren Buffett is perfect.”

Thus is the shakiness of the book’s apparent premise; that people are so wowed by Buffett’s extraordinary track record as an investor that they are somehow blind to the fact that he has made his share of missteps and that his investment philosophy and strategy are not for everybody.

Referring to many Buffett-watchers, Vahan Janjigian writes: “They believe he has become successful by simply implementing the same basic strategies over and over again. They also like to believe that anyone can be a tremendously successful investor just by learning some of Buffett’s favourite tricks and doing what he has done in the past. If only things were that simple.”

Of course, it’s up to the author to uncover Buffett’s feet of clay and the areas of incompatibility between the Buffett way and what most investors can do, given the latter’s more slender resources.

Some of these points are patently obvious. Do we need to be reminded, for example, that unlike Berkshire Hathaway and Buffett, most investors can’t afford to buy a significant stake in a listed company, let alone entire companies?

Nevertheless, it’s an important distinction. Buffett’s deep pockets and stellar reputation mean he can typically exert influence over the businesses he has invested in, thus improving his chances of getting good returns. Other investors can only hope they have made the right bets or that fellow shareholders with the same kind of clout that Buffett has, will step in when things go wrong.

Also, Buffett doesn’t need to spend much time sniffing out potential investments. Instead, he cherry-picks from the tonnes of deal proposals that he receives regularly.

This book is actually yet another analysis of the Oracle of Omaha’s moves that doubles up as an investment manual. “By studying Buffett you can learn what works and what does not work in most circumstances,” the author writes in the introduction.

“By learning everything you can about Buffett’s strategies, you will ensure that you have the information you need to maximise the probability of success no matter what your investment horizon.

“You will also develop an understanding of and an appreciation for the risks involved in the various kinds of investment strategies that are available to you. And you will make yourself a more realistic investor.”

Even Buffett Isn’t Perfect’s unique selling proposition is that Janjigian, chief investment strategist at Forbes, tackles the job by adopting a less-than-awed stance on some of the things the Berkshire Hathaway CEO has said and done.

The author highlights inconsistencies and mistakes, debunks common misconceptions, and offers alternative opinions, often backed by research findings.

For one thing, our fondness for convenient labels – plus, the man himself cultivates a certain public image – breeds inaccurate notions about Buffett’s approach to investment. Many people see him as strictly a value investor, but he also buys growth stocks. He is famous for his insistence on long-term holdings, but he also trades.

Janjigian takes up a few chapters to pick apart Buffett’s well-known views on corporate governance, succession planning, stock options, taxes and earnings guidance.

The author provides some sturdy arguments against Buffett’s positions, but when you consider the basis of the book, the question has to be asked: Since when is it an imperfection to have opinions that are open to debate?

Again, this exposes the flimsiness of Even Buffett Isn’t Perfect’s gimmicky framing device. But if you look past that, the book is a useful addition to the library of publications about Buffett. Its main value is that it promotes critical thinking over adulation.

And mind you, the book is not meant to put a dent in the Buffett legend. In the last chapter – indeed, the book’s subtitle is already a dead giveaway – Janjigian gives a tip of the hat to Buffett, pointing out that the man has made many of the other Berkshire Hathaway shareholders rich as well.

“Perhaps no other single individual has created more millionaires. Based on the evidence, it is certainly fair to conclude that Buffett is one of the greatest investors – if not the greatest investor – of all time.”

China:Aversion to Hot Money?

The tightening on bank of reserve requirement ratios and short-term debt yields lately has wrought some concern on both property buyers and stock punters.

Perhaps there are parties that are of the opinion that it is too soon for China to raise interest rates because inflation is still containable and a rate hike could spur an unwelcome influx of speculative money.

Xia Bin, head of the financial institute of the Development Research Centre, a cabinet think tank, said China’s economy could maintain relatively rapid growth of at least 8 per cent this year and keep consumer price inflation down to about 3 per cent, the official China Securities Journal reported.

Xia warned that if China raised interest rates before the United States did, it may attract unnecessary inflows of “hot money” while the consumer price index was still within a range where it could be kept under control.

Data released on Thursday showed China’s economy grew 10.7 per cent in the fourth quarter from a year earlier while the December CPI jumped 1.9 per cent year-on-year, accelerating from November’s 0.6 per cent rise. The strong data appeared to set the stage for further monetary tightening.

The central bank has already started to clamp down on the abundant liquidity in China’s markets by raising bank reserve requirement ratios and short-term debt yields over the past two weeks.

Xia’s latest published remarks echoed comments last month that China was unlikely to raise interest rates in the first quarter of this year.

He added the government should gradually make adjustments in the property sector over two to three years because aggressive moves could put pressure on the economy.

China is considering steps on second-home purchases and other measures to curb speculation and address a possible property price bubble.

It is better to be wary then to do costly damage control later. So tread carefully,won't you?