Inflation overtakes luxury goods growth - Rupert Hoogewerf

Rupert Hoogewerf

For the first time in a decade growth of luxury goods in China has stalled, as inflation is larger than the recorder growth, says China's rich list founder Rupert Hoogewerf, and composer of the China Luxury Goods Price Index in the Shanghai Daily. Causes: the fight against corruption and the economic downturn.

The Shanghai Daily:

THE cost of luxury goods and services increased at their slowest pace for seven years last month because of China's economic slowdown and the government's anti-extravagance campaign, the Hurun Research Institute said in its latest report. 

China's Luxury Consumer Price Index, which has monitored price changes in 77 luxury items since 2007, rose 1.52 percent in June from a year earlier, 3.42 percentage points lower than the increase in the same period of last year. It was the first time the index had been outpaced by China's inflation rate, which rose 2.7 percent in the same period. 

"Driven by consumer demand, luxury prices were increasing fiercely in the past few years, But that momentum seems to have come to a halt this year. The main reasons are China's economic slowdown and the fight against corruption," said Rupert Hoogewerf, Hurun's founder and chief researcher.

More in the Shanghai Daily.

Rupert Hoogewerf is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

China Weekly Hangout What do Chinese tourists want?  Roy Graff of +ChinaContact joined us to discussed the increasingly diversifying market of Chinese tourists. And yes, there is no longer one answer for basic questions. Moderation by +Fons Tuinstra of the China Speakers Bureau.

Corruption and healthcare are on the agenda of the China Weekly Hangout on Thursday 25 July. Announcements will be made later today, but when you follow our Google+ page, you won't miss any announcements.  

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Expect more inflation - Shaun Rein

Shaun Rein

More inflation of wages, food and commodities can be expected, tells business analyst Shaun Rein at CNBC, illustrating the case he makes in his upcoming book The End of Cheap China: Economic and Cultural Trends that will Disrupt the World. Shaun Rein, our China bull, in a bearish mood. (The book is already available on Kindle.)

Shaun Rein is a speaker at the China speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

 More on Shaun Rein and his upcoming book at Storify.

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Inflation still a problem - Wang Jianmao

Wang Jianmao

The debate between economists on how China should deal with its economy is running high. CEIBS professor Wang Jianmao warns in the US edition of the China Daily curtailing inflation should be high on the agenda, not loosening the financial strings on banks.

The China Daily:

Many economists now expect further loosening of the bank's reserve requirement ratio (RRR) in the first half of the year - allowing more credit back into the banking system - and then for interest rates to start being cut in the second half of the year. 

Wang Jianmao, professor of economics at the China Europe International Business School (CEIBS) in Shanghai, worries the government has not quite put the inflation genie back in the bottle and cautions about loosening monetary policy. 

He believes if the government pursues a policy of relaxing the RRR, it should actually also raise interest rates as a precaution. 

"I think any lowering of the Triple R and an increase in interest rates would be a very bad combination. I think the government needs to increase interest rates at the same time so we don't have a problem with inflation," he says.

More in the US edition of the China Daily

Professor Wang Jianmao is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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Relaxing money lending is the wrong policy - Shaun Rein

Shaun Rein

In a surprise move China's financial authorities decided last week to abandon their tight money lending policy and losend the reigns for its banks again. Wrong policy, says business analyst Shaun Rein in CNBC, who has been praising the government handling of inflation and overspending in the past. Shaun Rein:

The net result [of past policies] is that China has so far staved off the worst of the world's economic ills. Retail sales have grown 16-18 percent annually. The stock market almost doubled from its lows, and GDP has grown around 9 percent annually. 

China’s good times, however, might end after a major policy mistake by the central bank last week that could spur rampant inflation and trigger a speculative and very dangerous bubble in the real estate sector. The central bank dropped the reserve ratio requirement for banks by 50 basis points,signaling an end to the tight monetary policies needed to stave off inflation... 

By loosening the monetary policy so early, China’s central bank also sent the signal to local officials that real estate would continue to be a major revenue stream – both by land sales and tax revenue. This is unhealthy as far too many local governments generate the majority of tax revenue from the real estate sector. This reliance on easy tax revenue has stopped them from promoting actively enough small and medium enterprises, which should be the backbone of job creation. 

The central bank should have kept a tight monetary policy not just to stave off inflation but also to send a clear message to real estate developers, speculators, and local officials that the real estate sector cannot play such an outsized role in the economy.

More in CNBC

More links to Shaun Rein opinions on China's economy in Storify  

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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China should not ease lending too fast - Victor Shih

Victor Shih

Dropping inflation, a bumper harvest, falling food prices and other good financial news does not mean China's financial institutions should leave their policies of tight lending, writes financial analyst Victor Shih in the Financial Times. Even though many industries anticipate easier lending soon.

Victor Shih:

The sell side community is already priming for macroeconomic loosening in the form of reserve requirement ratio reduction or even a drop in interest rates. 

To be sure, some liquidity would alleviate pressure in many quarters. 

The entire Rmb1,000bn railroad construction industry faced mass bankruptcy until the central government ordered banks to lend Rmb200bn to bail-out the Ministry of Railroad and its contractors. 

Wen Jiabao had to fly to Wenzhou to order banks to keep lending to small and medium enterprises. Some are hoping that the government will do the same for infrastructure and real estate through more general easing. 

Yet, policymakers should think twice before easing too much. Inflation remains high, and food inflation for the year remains at over 12 per cent, which especially high pressure on low income households. 

Aggressive general easing, such as a rapid lowering of RRR, would once again build up inflationary expectation in China and international expectation for high commodities prices. China could be back in a high inflation situation in a year’s time. Moreover, any aggressive easing now would render macroeconomic tightening incredible in the future.

 More in The Financial Times.

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

More links to Victor Shih's activities at Storify.

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China tied by debt and inflation - Shaun Rein

Shaun Rein by Fantake via FlickrChina will not be able to play a role in mitigating a new financial crisis, like it did in 2008 at the first dip, writes business analyst Shaun Rein in CNBC. Sky-high debts and a stiff inflation rate limit the country's room

In CNBC:

Three years later, total local government debt alone is 10.7 trillion yuan, around 27 percent of GDP according to Jia Kang, the director of the Research Institute for Fiscal Science under the Ministry of Finance. Concerns about off-balance sheet debt held by special investment vehicles set up by local governments that don’t show up as public debt are also high. China's debt is far from dangerous, Japan’s debt was 225.8 percent in 2010 according to the IMF, but is high enough to mean less room to maneuver than in 2008.
More importantly, China has less wiggle room because of persistent and structural inflation and the government's desire to create a middle class by raising minimum wages. Already in 2011, 13 provinces have raised the minimum wage by over 20 percent.
Chinese inflation is not at the 20 percent annual level hitting Vietnam, but it is at the cusp of becoming a serious problem. One more natural disaster like the tsunami in Japan or a war on the Korean peninsula could turn China's inflation into something along the lines of Vietnam's.
Official Inflation in China came in at 6.5 percent in July, despite price caps in the oil sector.Food inflation is far more serious at 10-15 percent. Pork prices, the main meat staple for Chinese, has risen 50 percent in the last year. Apple prices have gone up 30 percent and yogurt 25 percent.

More in CNBC

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.

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How the US downgrade affects China's inflation - Shaun Rein

The world's major stock markets braces for a black Monday, but also China's financial policy makers have had a sleepless weekend over the US downgrade by S&P, Shaun Rein writes in the CNBC. They get now very vocal on the financial problems of the US.

The downgrade will have a far more serious affect on China than just eroding the value of its reserves, but there are no easy solutions. The most serious problem in the short term is inflation, which will get worse as investors shift away from U.S. dollars and into commodities.  On Monday there was a selloff in commodities, but in the long term if the dollar continues to fall commodity prices will rise. The downgrade also increases the possibility of another round of quantitative easing in the U.S., which is negative for the dollar and will heighten inflation.

Inflation has already been running rampant in China as rising labor and real estate costs combined with soaring global commodity prices have been a double whammy for the economy.

Inflation officially hit 6.4 percent in June, a three-year high, but it feels much higher for everyday Chinese because food costs have soared 10 to 15 percent. Yoghurt prices have gone up 25 percent in the first half of the year and home prices in most of the country have risen by double digit percentage points in 2011 despite tighter policies on mortgages. Thirteen Chinese provinces raised their minimum wages by over 20 percent in the first half of the year...

The bickering by America’s political class is having grave affects on China and the rest of the world. The damage to America’s standing in the eyes of the rest of the world has been far worse because of the perception that the world’s financial system has been hijacked by members of Congress who put political campaigning ahead of reason.

More in CNBC

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting of conference? Do get in touch.

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On phantom facts and China bears - Shaun Rein

Shaun Rein

The China bears should get their facts straight, writes business analyst Shaun Rein in CNBC. He takes aim at economist Nouriel Roubini and MIT professor Huang Yasheng.

Shaun Rein's arguments against Huang Yasheng:

Huang ..., in a July 6, 2011 blog post in the New York Times says, “Beijing and Shanghai have some of the lowest population densities among the world’s big metropolises.” From this Huang concludes that Shanghai’s infrastructure buildup is not needed.

In fact, Shanghai has the highest density of urban populations in the world at official population numbers, which does even include millions of unregistered workers in the city. It is not uncommon for Shanghai families of three or more to live in less than an area of 200 square feet per person, while the average home in America is 10 times that size.

Most workers in the restaurant and construction industries live in sub-human dormitories, where eight people or more share a room. Infrastructure spending is badly needed to relieve living congestion by allowing for cheaper land sales farther from the city center just to get basic living space for people.

Huang also underestimates the middle class’s purchasing power, but he does bring up important issues. Namely, China needs to avoid falling into the middle-income trap that many developing countries do when per capita GDP hits $6,000 a year and stagnate. If it does not, China will be more like a Mexico, with huge income disparity between the rich and poor, rather than the world’s leading economic superpower.

More in CNCB

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.

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The political risks of China's debts - Victor Shih

Victor Shih

Social instability and a touchy change of power in 2012 are just two of a set of stinging problems China's sky-high debts is causing the country, political analyst Victor Shih tells the Global Post in an extensive interview on the country's shortfall. Some quotes:

Americans probably wouldn't be hurt that much. Some people worry that if there's a debt bubble that somehow bursts, then China will redeem its large holding of U.S. Treasuries to bail out Chinese banks. That is a possibility. I think that if that were the case, others would snap up those Treasuries. Interest rates may go up a little bit, but probably not by that much.

As for the Chinese government, the current leadership steps down from power next year. They don't want to look bad by revealing that they got China into so much debt. On the other hand, the new leaders will want to do more to reveal the problem, because otherwise there's some risk that they will be blamed. So we do see this kind of conflicting tendency within the Chinese government to disclose how much local debt there is....

The downside of all this debt, it seems, is that the government's legitimacy depends on its ability to continually improve the standard of living of its people. Could inflation and debt provoke instability in China?

There is already a huge amount of instability in China. There have been 80,000 mass incidents, some of them are very peaceful sit-ins, but there are thousands of riots in China. But all of these incidents have been very isolated to one or two places, there has not been any sort of inter-regional unrest.

When you have such a powerful apparatus to maintain control, why do you need legitimacy?

Some Arab governments these days may have a tough time with that question.

The Chinese government would say that that's because they allowed social media to operate freely, which is not the case in China.

More in The Global Post

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.

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China's leadership: caught between inflation and deflation - Paul Denlinger

Paul Denlinger

Cooling down inflation, stiff rising wages: China's leadership has a hard time to steer between two evils, writes business analyst Paul Denlinger in Forbes. Things do not look well for the new leaders in 2012.

In effect, Beijing is trying to repeat what the four dragons (Taiwan, South Korea, Hong Kong and Singapore) did when oil prices went up in the eighties: it is trying to move to higher value-added industries. But because China’s production base is so large compared to those economies, it raises another question: Who is going to buy all those nice new Chinese products? The export markets of the US and Europe have largely disappeared after the Wall St. meltdown of 2008, and the new Chinese middle class which was going to become the savior of the world has not yet appeared...

In 2009 and 2010, China looked like a genius for its bold action with a stimulus package and investment in infrastructure. In 2011 though, it looks more like China bought extra time for the US economy to recover and US consumers to start spending again. But waiting for Americans to start spending like before is looking more and more like “Waiting for Godot”. But what about China’s middle class? China already has more than 1M persons with individual net worth of more than US$1M, and Chinese are now the leading buyers of luxury goods worldwide.

In fact, these are the people who have made it, and are now buying real estate in the US, Canada, the UK, and Australia. Many of them feel more secure flaunting their wealth overseas and retiring overseas than in China, because they don’t know how the political winds in China may change...

In 2012, a new leadership will come to power in China. In China, these power transitions are carefully orchestrated so that the new leadership can come into power at the best of times, strengthening the legitimacy of the government and party and showing their power in a positive light.

For the first time in the past 30 years, the stars are not lining up the way they should.

More in Forbes.

Paul Denlinger is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.

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Inflation is _not_ under control - Shaun Rein

Shaun Rein

China's premier Wen Jiabao, Jim O’Neill, Chairman of Goldman Sachs’ Asset Management, argued this, and an analyst at Royal Bank of Canada says inflation is under control, but our Shaun Rein begs to differ, in CNBC.

I asked my office landlord recently if rent would go up 10 percent when our contract ends at the end of this year. She laughed and told me 20-30 percent at least. Taxi prices will rise 20 percent in Shanghai and other cities soon. The Shanghai government has said taxi fares will be raised after the public discussion period in June. Fuel surcharges have also gone up in Shenzhen and Beijing.

Plus tax breaks implemented during the crisis are being rescinded. In other words, a perfect storm of rising wages, rents and commodities will force most companies to begin transferring prices to the end consumer. With brownouts set to hit 10 manufacturing oriented provinces this summer, pricing pressures will only continue.

In order to stave off potentially destabilizing inflation and a housing bubble, the government should leave tightening measures in place in the short-term. Until the U.S. dollar regains its strength or America ends its wars in the Middle East, causing commodity prices to drop, there is no way inflation is a short-term issue for China.

More arguments in CNBC.

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.

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Roubini's phantom facts on China - Shaun Rein

Nouriel Roubini via Wikipedia

Famous economist Nouriel Roubini took a fast train from Shanghai to Hangzhou and saw it was almost empty. Shaun Rein explains him in Forbes why one train ride is not enough to predict a bubble in China that will pop in 2013.

Shaun Rein:

He has been quoted by Reuters as saying, "'I was recently in Shanghai and I took their high-speed train to Hangzhou,' referring to the new Maglev line that has cut traveling time between the two cities from four hours to less than one. 'The brand new high-speed train is half-empty and the brand new station is three-quarters empty. Parallel to that train line, there is also a new highway that looked three-quarters empty. Next to the train station is also the new local airport of Shanghai and you can fly to Hangzhou,' he said. 'There is no rationale for a country at that level of economic development to have not just duplication but triplication of those infrastructure projects.'"...

However, most of Roubini's conclusions are based on phantom facts, as is his evidence for why China will have economic problems. There is no direct flight between Shanghai and Hangzhou, nor is there a maglev train system connecting the two cities. Shanghai has two, not three, airports, and the last new one opened a dozen years ago, in 1999. Both the Hongqiao and Pudong airports have been adding runways and terminals because the airports are too crowded, contrary to Roubini's suggestions of emptiness. Pudong's passenger and cargo traffic grew 27% in 2010, to 40.6 million passengers. It is now the third busiest airport in the world in terms of freight traffic, with 3,227,914 metric tons handled every year...

China is not immune to economic cycles. It will definitely go through rough patches in the coming years, and housing prices may in fact fall. Despite a relatively efficient bureaucracy, no government can stave off market forces forever, and problems are starting to arise. However, the headwinds are coming from raging inflation, a shrinking labor pool and a weak education system, not from over-construction in infrastructure spending, as Roubini argues. It is important that analysts use real, not phantom, data points to draw conclusions about China.

More in Forbes.

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? D

Shaun Rein

o get in touch.

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China sends its inflation to the US - Shaun Rein

Image via Wikipedia

Ben Bernanke: reasons to worry

Federal Reserve chief Ben Bernanke is not worried about inflation in America, writes Shaun Rein in CNBC, but he should be worried when China sends its high costs to the US.

Conventional wisdom of many economists over the last quarter has been that administrative measures like increasing bank reserve ratios, which the Chinese government has implemented, were enough to tame inflation in that country and prevent price hikes on goods exported to the US and Europe.  Those analysts must be looking at a different China than I am.

Last week guards in the compound where I live in Shanghai went on strike demanding higher wages. Severe drought has caused vegetable prices to soar 20 percent in the last month with cabbage prices rising 60 percent.

The situation is set to worsen as brownouts hit 10 provinces in the main manufacturing belts of the Pearl and Yangzte River Deltas as electricity firms lower production in response to price caps...

Rising prices on the costs of goods sent to America will continue as domestic Chinese inflation reaches a boiling point, and we have yet to reach the high mark. Tightening measures have not solved problems because China is facing a perfect storm: a confluence of the nuclear disaster in Japan that disrupted supply chains, water and energy shortages, an appreciating yuan and finally systemic issues...

The American and Chinese economies are too interrelated now to say that inflation in China won’t eventually move to the US. Bernanke has been wrong to only look at the short-term with regard to the American domestic economy as his loose monetary policies have caused inflationary bubbles in emerging markets and commodities. After a lag time, eventually inflation will go back to America.

More in CNBC

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.

Shaun Rein

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China is hiding, not solving its financial problems - Victor Shih

Victor Shih

China bear Victor Shih explains Medill Reports from Chicago why China's growing debts are getting out of hand, despite efforts by the financial authorities to act on the growing concerns. It's a wash, he claims.

The prudential tightening being undertaken by China’s central bank has not been very effective, he said. China’s central bank is increasing reserve requirement ratios while also buying bonds from the market. “If you put the two things side-by-side, they are a wash,” Shih said.

“In fact, money supply has risen substantially since late last year. It’s growing at a 17 percent” annual pace, he added.

According to Shih, the reason behind the conflicting measures is that there are a lot of nonperforming loans sitting on the banks’ balance sheets, which “they are trying to hide.” One classic way of hiding those bad loans is to allow the banks to roll the loans over.

And this is happening on a large scale in China.

From a bank's perspective, this is not a trivial event. If borrowers couldn't repay their loans, soon the bank would find itself strapped for cash to make new loans.

Shih said the only way to keep the whole thing going with "rising illiquidity on balance sheets" is to increase the money supply, which is what the government has done in order to keep banks lending.

This is why there continues to be inflationary pressure in the country, he explained.

“This problem will continue to haunt China,” Shih said. “There will continue to be, maybe not super-high inflation, but an uncomfortable level of inflation.”

More in Medill Reports.

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.

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One-off revaluation needed to fight inflation - Shaun Rein

The Chinese government should be revaluate its currency on one time to stop the price rises in the country, Shaun Rein explains in CNCB. In the past he argued against a too fast increase of the value of the renminbi, since that would hurt the export and the manufacturers. Now, to prevent social unrest, stiff action would be needed to stem inflation.

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.

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Inflation raises tensions - Shaun Rein

Shaun Rein by Fantake via Flickr

The unusual fine of 2 million RMB (euro 200,000) for Unilever after announced prices rises caused a stampede, illustrates how inflation is becoming a headache for the authorities, Shaun Rein says in various comments.
In AFP:

"This is a very unusual measure. I think it is a way of scaring companies to think twice before they raise prices," Shaun Rein, managing director of China Market Research Group in Shanghai, told AFP...
"Consumers feel it is much harsher... food prices from yoghurt to milk to eggs to cooking oil have gone up 10-20 per cent in the past six months," said Rein.

In Market Watch:

The fine levied on Unilever reflects Beijing’s growing sensitivity about inflation numbers, according to China Market Research managing director Shaun Rein in Shanghai.
Government officials and company executives were also aware of the growing political sensitivity of the issue, Rein said.
“Last month’s leaks really upset certain folks, so everyone will probably be more tight-lipped,” Rein said.

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Inflation undermines consumer confidence - Arthur Kroeber

Arthur Kroeber by Fantake via Flickr

China's government is placing its bets on increasing domestic spending by consumers, tells Arther Kroeber in The Guardian. But the inflation seems to be undermining the confidence among those consumers.

The 11.7% rise in food costs reflected growing demand, a shrinking pool of young workers – pushing up agricultural wages – and supply chain problems, said Arthur Kroeber of economic consultancy GaveKal-Dragonomics.
"In public, the officials like to talk about commodity prices, because it is always easier to blame problems on something outside," he said. "But if you look at what they are actually doing, I think it is pretty clearly understood that the sources of inflation are domestic."
That required tighter monetary policy and market reforms to improve efficiency, he said...

Kroeber said: "There's a consumption component that's very strong, but the retail sales number is going down. If you look at auto sales, they've slowed down a lot. Consumer confidence surveys show it has progressively weakened over the last six months.... The headline number is implausibly strong."
He said the data did not allow analysts to judge what was happening to consumer spending.

More in The Guardian

Arthur Kroeber is a speaker at the China Speakers Bureau. When you need him at your meeting or conference, do get in touch.

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Shaun Rein addresses at CNBC China's largest nightmare, inflation, as real estate prices and wages go up. But he remains optimistic about the country's consumers, who keep on buying for the coming six months.

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Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.

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Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.