China inflation: Bang a Gong

(Get it On.)

JP Morgan's Frank FX Gong (Wharton PhD, ex-NY Fed... and his real initials) wrote in a very good piece last night on what to worry about in China and why we should not panic about food price inflation.

• China's food inflation (the key contributor to China's headline inflation) is very different from the global food inflation;
• The global food inflation has been led mainly by cereal (wheat, corn & rice) while China's food inflation has been mainly led by pork/meat;
• China is a net exporter of cereal (rice, wheat, & corn), while the global meat/pork prices are much cheaper than China's domestic price and China has not been a big importer of meat/pork despite higher domestic meat/pork inflation;
• No need to panic on China's food and headline inflation: if China really wants to kill the food inflation and bring down the headline CPI inflation, they can simply start to import meat/pork from the global market - especially so with a faster appreciating RMB. China absolutely has no need, and would NOT need to kill food inflation by hiking interest rates.

(Chart: JP Morgan)

Risk appears to be to the upside for refiners and IPPs in terms of the possible lifting of price controls if China's CPI figures, due late next week, remain under control. But I can't really understand why China is not ALREADY trying to bring food inflation down - food remains a significant part of rural household expenditure doesn't it? Is it just banking on a base effect kicking in during 2H to lower headline figures? (Peasants can't eat base effects!) Or perhaps the government wants a bit of pain on the cost/ margin front to squeeze out waste and inefficiency??

Slightly different from the Credit Suisse conclusion (from the Purchasing Managers Index input price trends) of widespread inflation kicking in that I mentioned on Monday. Looks like a fine line the PBOC is walking, if you ask me. On balance, I'm sticking to more accommodative policy for the time being.

Annoyingly, I can't figure out how to find his actual note on the MorganMarkets website to give you a document pull link. Maybe it'll come up on his page later in the day. (Even more irritating than Credit Suisse's site, but at least, unlike Merrill's, still works - just about - on Firefox.) AND yes, of course I'll e-mail you a copy if you ask nicely!!

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Earlier piece by Frank's colleague, Jing Ulrich, in which she points out China's shift in concern from inflation to growth. I also mentioned it in an earlier post, but hers is better!