Those economists and traders who thought that the November 10 increase in the reserve requirement for China’s banks was a sign that inflation in October had soared have turned out to be absolutely correct.
But too conservative.
After the People’s Bank of China raised reserve requirements for the country’s biggest banks another 0.5 percentage points to 18%, speculation said that inflation numbers to be released on November 11 would show inflation to have soared to 4% in October from 3.6% in September. Both figures are way above the government’s 3% target for 2010.
The actual numbers released today show consumer prices moving up to 4.4% for October. Despite all the increases in reserve requirements, despite all the tighter rules for lending and on mortgages, despite the first increase in China’s benchmark interest rates since 2007, inflation continues to accelerate in China.
And all the signs are that inflation pressures are still building in the pipeline. Growth in industrial output did decline to a mere 13.1% gain from October 2009 thanks to government rationing of power use by the country’s heavy industries but inflation in producer prices still sped up to a 5% rate. Inflation at the producer level frequently turns into inflation at the consumer level with time.
New bank lending, a key driver of asset inflation that Beijing has struggled in vain to get under control ever since China’s banks blew through lending quotas in 2009 , rose by a higher than projected $89 billion in October. To have any hope of keeping to government quotas for 2010 new bank loans for October and the rest of the year would have to average no more than $70 billion or so a month. Kiss that hope goodbye.
And there’s a bit of evidence that Beijing is more than a little worried by this trajectory. Bloomberg is reporting this morning that yesterday’s 0.5 percentage point in reserve requirements was actually a full 1.0 percentage point increase for the biggest banks such as the Bank of Communications. Regulators in Beijing have been pretty consistent in carefully measuring out increases in reserve requirements in 0.5 percentage point increments so a move to a full percentage point increase in one fell swoop would indicate an acceleration in the rate of policy response.
In another sign of how seriously the government takes the situation, Beijing has started to look for scapegoats. Zhang Ping, one of China’s top economic planners, said this week that the government may miss its 2010 inflation target of 3% (May miss?) because excessive global liquidity and a weak dollar are pushing up commodity and food costs resulting in “imported inflation.”
Sure. And China’s undervalued currency and out of control money supply and banking loan growth have nothing to do with China’s inflation problem.
Look for more moves by Beijing on the inflation front in coming days. October’s inflation number raises the odds that China will increase the appreciation of the renminbi to 5% or so in 2010 from the 3% projected by many economists. And I think another interest rate increase by the People’s Bank of China is now almost certain. Worry about such an increase is likely to weigh on China’s stock markets. On past performance, though, the actual increase would be greeted with relief.