Goldman: Chinese Government Tightening Is Way Behind The Curve, Inflation Will Explode
Tags: Markets, Wall Street, Goldman Sachs, Stocks, China, Asia
While the Chinese government will attempt to tighten its monetary policy in 2010, it will likely be too little too late, according to latest research from Goldman Sachs' Helen Qiao. This means Chinese inflation could explode:
Goldman: We see increasing risks of stronger aggregate demand and higher inflation. We believe the rapid recovery in external demand and stimulus from insufficient monetary tightening in the near future will likely cause the output gap to close and turn positive earlier than we previously expected. As demand growth outstrips its long-term potential, especially when measured by industrial and electricity production (given the complication of GDP reporting), inflationary pressures will likely build. While we believe policymakers have already started to adopt tightening measures to absorb liquidity and will probably resume control on loan extensions soon, the pace and magnitude of the tightening could still be insufficient to rein in inflationary pressures.
We raise our inflation forecasts due to the deteriorating outlook on the growth-inflation nexus. A review of the output gap and CPI inflation data since 2000 reveals a consistently positive relationship known as the Phillips Curve (see Exhibit 5). Based on this relationship, we adjust our 2010 CPI inflation forecast to 3.5% yoy from 2.4% yoy, and expect PPI inflation to reach 5.5% yoy.
Implications? Risk of a Chinese economic hard-landing caused by over-tighting is minimal at this stage given that current efforts to control inflationary forces are so far behind the curve, and economic growth so robust. Check out the latest electricity production data from the same Goldman piece:
Is it just us or is every major house arguing that Chinese liquidity won't go away any time soon?
Goldman: We continue to believe timely and effective policy tightening is warranted at this stage and the risk of over-tightening remains limited. We have argued that policy remains too loose, not too tight (see Why we continue to like AEJ currencies: it’s still “Broader, Deeper and Tighter” but accelerating inflation and exports add further fuel post-payrolls, Asia Views, January 11, 2010), and are of the view that the policy moves the central bank launched recently help reduce the risk of a policy mistake (of doing too little and too late). While policymakers may impose credit quotas again soon, we still believe it will take them more than another month to decide whether to adopt a full-scale tightening. This therefore leaves the risks to inflation and growth on the upside.
(Via Goldman Sachs, Asia Economics Analyst, Michael Buchanan, Helen Qiao for China, 14 January 2010)
http://www.viewsflow.com/article/goldman-chinese-tightening-is-behind-the-curve-inflation-will-explode
