On my Sunday blog entry, after Saturday evening’s surprise hike in the minimum reserve requirements, I said I expected the market to drop this week, but I had no idea that it would drop as much as it did. The SSE Composite closed Friday at 3300 (yesterday was a holiday). Today, in the first 30 minutes of trading, the market plunged 159 points (4.8%), and then spent the rest of the day giving up another 99 points to close at 3072, or 7.7% down for the day. Banks, securities firms, real estate companies and auto manufacturers – all institutions that are likely to be hurt by lending constraints – led the fall, joined by China’s oil companies, who were hurt because of the continued rise in global oil prices (the price at which they sell in China is capped, so rising prices means greater losses).
This puts the market at a mere 2.4% above 3000, a level at which many people believe the government will intervene to support the market. Already I am hearing fevered speculation about what the government will do during the rest of the week to keep the market from dropping further. It may have a few administrative measures left, but rising inflation and rising commodity prices are hurting corporate earnings, and unless we see a dramatic improvement I think its just a question of time before we break solidly below 3000, in which case the market will probably plunge.
The most important news today was probably a report by Market News International citing two unidentified government officials who claim that May CPI inflation (which will officially be released Thursday) will come in at 7.7%. These rumors have almost always been correct in the past, and the market is treating this number as the official release. Most commentators had been predicting CPI inflation of around 7.8% or so, so the actual number is a little better than expected. In April CPI inflation year on year was 8.5%.
If this 7.7% number turns out to be correct, CPI will have declined during the month of May by 0.4%. This is certainly good news but – not surprisingly, I guess, given my monetary pessimism – I would say that it shouldn’t give too much comfort to the pro-growth camp in China. First of all, the decline in prices is really little more than a reversal of the huge CPI jump in January and February (1.3% and 2.5% month on month, respectively). Viewed over the longer term, CPI increases are still accelerating. Second, we all expected food prices to decline in May and so drive down CPI, but the real question is whether non-food price inflation is accelerating. If it is, it will suggest that inflation is indeed driven by excess money, and even the most optimistic will find recent monetary conditions worrisome.
Third, with price controls on so much of the CPI basket, headline inflation is being disguised as shortages, lower corporate profits and higher taxes (and concerns about fuel shortages around the country are rising). As a related aside, a Peking University economics professor told me jovially over lunch yesterday that whenever the government is determined to see an improvement in certain fundamentals, and a proxy is selected to represent those fundamentals, the proxy almost always immediately improves – whether the fundamentals improve too, however, is another matter. CPI is the inflation proxy of choice – so perhaps it is not unreasonable to expect to see CPI and real underlying inflation part ways.
Finally, and this may be an illustration of just this parting of ways, there are rumors that PPI numbers, to be released tomorrow, are going to be less than stellar. I haven’t heard concrete numbers yet but friends who try to track the components of PPI are suggesting that the PPI figures will indicate that inflation is definitely spreading away from food and into other areas. According to Bloomberg, the consensus is for PPI to come in at 8.3%. It was 8.1% in April and 8.0% in March.
I will be traveling tomorrow until Friday so I may have difficulty posting in the next day or two.
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