machines, or were virtually given such machines, havefound them unusable because their homes lack either therunning water or electricity (or both) necessary to makeuse of a modern appliance. Such problemsarise when ambitious planners count ship-ments as retail sales while end-use demandmay be absent. In such cases, the “sales”are made to happen by virtually givingaway the products that have already beenproduced and counted as GDP growth.On a broader scale, part of theenhanced money-credit stimulus beingundertaken in China reflects concernsthere that global trade growth—especiallythat tied to U.S. demand—will notresume in the second half of 2009. In order to underpindomestic demand growth, China’s central planners arewilling to let the flood of cash boost stock and propertyprices in the hope that this will raise confidence suffi-ciently to increase spending inside China. This is a riskyundertaking, as reflected in the virtual doubling of theShanghai Stock Market so far this year and the reappear-ance of real estate speculation during the second quarter.Speculative flows into Chinese stock and property mar-kets have become so intense that authorities fear anyabrupt cessation could burst the equity bubble, especiallygiven that the state-owned enterprises and other recipi-ents of stimulus funds have purchased stocks themselvesrather than leaving funds idle until they can be disbursedfor actual projects and have already been counted in GDPdata as having been undertaken. China’s State Councilapparently has decided to overrule those at China’s cen-tral bank—the People’s Bank of China—who are worriedabout the bubbles and to keep the party going with con-tinued rapid money and credit growth.It is the intensification of efforts to use rapid moneyexpansion that serves as evidence that private consump-tion and private investment have remained weak eventhough they are difficult to measure since little data areavailable on such demand-side components of GDP.Meanwhile, as already noted, China’s export growthremains weak, with exports dropping at a year-over-yearrate around 20 percent during the first half of 2009, aftergrowth rates of 17 percent in 2008 and 25 percent in 2007.Having announced a stimulus package that will boostdomestic demand in order to compensate for the loss of export growth on overall economic growth, China’s plan-ners are not about to risk any cessation of the intense mon-etary stimulus currently underway.That said, there aresigns that problems are emerging from China’s growthpolicies that amount to assuming that supply creates itsown demand with the help of adequate monetary stimulus.
Goods Inflation Still Absent . . .
China’s year-over-year consumer priceindex inflation rate is still negative, mostlybecause of far higher energy prices lastyear. But the threat of higher future infla-tion is emerging and has raised publicconcerns at the People’s Bank of China.The surge of Chinese flows into the stockand property markets has been intensi-fied by rising foreign capital inflows toChina.Foreign investors are starting to pile on to China’sliquidity-driven flows into those markets. An estimated$25 billion of “hot money” (inflows less trade surplus andforeign direct investment) surged into China in June.This may not end well—bubbles burst even in China—but it probably has a way to run, taking Chinese stocks,property, and commodity prices with it. There has been, andwill continue to be, some positive spillover into prices inglobal commodity and stock markets as we saw in mid-July.
...But Asset Prices Accelerating
The big risk from higher inflation in China lies with theproblems faced by typical Chinese households withwealth storage. Chinese households save a high portion of their income because they have to provide, on their own,for health care, retirement, emergency outlays, and otherneeds that are provided by governments in most advancedeconomies. Typical households have limited alternativesbeyond stock-market and property speculation as ways topreserve wealth in an environment of rising prices. As wemove into the second half of the year, year-over-yearinflation will almost certainly pick up in China simplybecause last year’s rapid run-up in energy prices happenedduring the early part of the year and abated later in theyear. So year-over-year comparisons will shift from a refer-ence point with very high prices to one with more mod-erate ones. Already,the house price index in thirteenmajor cities has risen about 13 percent from its Februarylow, suggesting that easy financing and concerns aboutrising prices are pushing Chinese households andinvestors rapidly into the property market. China’s deci-sion to allow this to happen as a way to boost overalldemand and confidence is a risky one because it looks as
China’s export growthremains weak, withexports droppingat a year-over-yearrate around 20 percentduring the firsthalf of 2009.