Tuesday, November 16, 2010

Shanghai Plunges Again as China Contemplates Price Controls as Hot Money Inflows Stoke Inflation

It appears the increase in inflation in China from 9%ish to 11%ish mid 3%ish to low 4%ish is causing all sort of havoc. [Nov 12, 2010: Even China Accuses China of Fibbing about Inflation[Sep 13, 2010: BW - What's China's Real Inflation Rate?  (What's China's Real Anything?)]  Amazing what "half a percent" of additional inflation can do. ;)  Chinese markets plunged anew, this time to the tune of 4%... following up Friday's 5%+ dip.  (China really needs a premarket 'urgent buyer' to help stop these selloffs)  This chart is one day below but the Shanghai index closed just below 2900, taking it right to the 50 day moving average.  In the snap of a finger.

Thus far the flood of central banker liquidity is playing out as expected - creating price increases (potential early stage bubbles) in commodities and emerging markets as healthy economies attract all the hot, speculative money.  Therefore Bernanke and cohorts are doing a great job of creating inflation... in all the wrong places (where there is velocity of money).  For stagflation to really take root in the U.S. (ex food and energy), the Chinese would need to offset the hot money by increasing wages, prices et al.  Then the U.S. would import the inflation in a great circle of life.  Then instead of higher prices in only food and energy, the middle and working class can enjoy substantial price increases in all things Walmart and Target....  aka "success" in the Bernanke plan.

However we have a wrench in that outcome - China appears to be imposing price controls, at least on food.  Not surprising considering the % of income devoted in the bottom 2/3rd to 3/4ths of Chinese on foodstuffs is tremendous, and hence is a big political issue.   So for now it appears the Chinese will eat the bill.

U.S. markets were off substantially overnight threatening to break substantially below the 200 week moving average (game changer), but the 'urgent' buyer has been working his magic all morning and things are more benign as I type.  We'll see what happens this morning on the open - S&P 1192 remains the key level.

Via Bloomberg:
  • China’s stocks fell, driving the benchmark index to the lowest in a month, on speculation the government will intensify measures to curb accelerating inflation including higher interest rates and price controls.
  • “Speculation that the central bank will tighten monetary policy continues to dog the market,” said Wang Cheng, a strategist at Guotai Junan Securities Co. in Shanghai. “The market will be under pressure for the coming three to 12 months from the threat of measures to cool inflation.”
  • The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, tumbled 119.88, or 4 percent, to 2,894.54 at the close, the lowest since Oct. 14. 
  • The index has plunged 8 percent in the biggest loss for a three-day period since Sept. 1 on speculation policymakers may raise rates for the second time in two months to curb gains in consumer prices. 
Key wording:
  • Central Bank Governor Zhou Xiaochuan said today China is under “pressure” from capital inflows as a state newspaper said price controls could be imposed to cool the fastest inflation in two years.
  • “Some emerging economies have grown quickly and face some pressure of capital inflows” as growth in developed nations has slowed, Zhou said. Rising prices in China need attention and officials should “strengthen liquidity management and maintain moderate growth in credit and money supply,” he said.
  • China will introduce measures to control rising food prices, including limits on how much products may be sold for and subsidies, the China Securities Journal reported, citing an unidentified person. 

  • Corn prices in China jumped to a record today and rice also reached an all-time high.
  • “Governments usually tend to adopt some form of price control measures when inflation becomes a social issue,” said Peggy Chan and Vincent Chan, analysts at Credit Suisse.
  • "Inflation is very high and the government acknowledges that,” Andy Xie, an independent economist, said in a Bloomberg Television interview in Hong Kong. “They will raise interest rates soon.”

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