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Strategies & Market Trends : Heinz Blasnik- Views You Can Use -- Ignore unavailable to you. Want to Upgrade?

To: LLCF who wrote (3295)	7/29/2003 8:00:38 AM
From: Box-By-The-Riviera™	Read Replies (1) \| Respond to of 4905

July 29, 2003 As Price Pressure Rises In China, So Do Jitters By JAMES T. AREDDY DOW JONES NEWSWIRES SHANGHAI -- China, so often accused of foisting deflation on the rest of the world, now faces inflation risks. A number of signs suggest price rises in China are taking hold quickly, prompting a debate framed around the country's exchange-rate policy. At issue is whether China is trending toward a normal, controllable pickup in prices or the kind of runaway inflation the country endured during the late 1980s and early 1990s. The central bank expressed its concern Monday. China will nip price pressures early, "rather than launching measures when the inflation signal is very clear," Zhou Xiaochuan, governor of the People's Bank of China, said in a speech released by the central bank. Mr. Zhou reiterated the central bank's concern about high real-estate prices, warning that inflated property can be particularly dangerous. When the inevitable price shakeout occurs, he said, individuals tend to get hurt. So does the banking industry, he added, underscoring sensitivity about a system that already is weighed down with 40% of loans considered noncollectable. U.S. Federal Reserve Board Chairman Alan Greenspan is among those who have warned the yuan's fixed rate, widely considered to undervalue the currency, could make the Chinese economy overheat. If the exchange rate remains where it is, dollars will continue to enter the country as the inexpensive yuan makes China's exports highly competitive, and increasingly narrow the monetary-policy options of China's central bank. Mr. Zhou said the central bank doesn't have any intention of compromising its currency policy in its quest for price stability. Inflation in mind, the central bank in April re-engineered its monetary-policy mechanism to better deflect inflation. It introduced a U.S.-style program of selling short-term debt to give itself footing to handle the dollar onslaught. Mr. Zhou said the program would be improved. Figures bear out signs price pressure is building. Money supply and lending have each surged more than 20% during recent months, and the local bond market is discomforted that severe acute respiratory syndrome tripped the economy less than expected. China's consumer-price index recorded inflation each month during the first half of 2003, rising in June to 0.6% above the year-earlier level. The rebound follows years of anemic pricing, the result of ferocious competitiveness. Outright deflation gripped the economy during 2002. Declines in consumer prices for 11 of 12 months last year sparked global worries deflation was China's newest and most dangerous export. The International Monetary Fund's Web site has 143 documents linking "China" and "deflation." Foreign economists tend to be skeptical of the worry about overheating, partly because the flip in sentiment has been so abrupt. Also, prices still are falling on some important products, such as mobile phones and other manufactured consumer goods. "We don't see enough evidence to substantiate the argument," a recent report by Yiping Huang, a Citigroup Inc. economist in Hong Kong, said. China's currency policy is a major departure point for views on the extent of inflation risk, an increasingly politicized and global debate over how much the yuan's current undervaluation matters. Many of those optimistic money-supply expansion will be easily contained are betting Beijing will adjust rules that govern its exchange-rate regime, if not allow the currency to rise outright in value. Others are saying China will increasingly challenge a textbook economic theory that policy makers can control either the exchange rate or interest rates, not both. Almost every dollar that enters China is exchanged into about 8.3 yuan. These new yuan are a potential ingredient in inflation, and whether they get into the economy is critical to the issue of overheating. The way China is choosing to handle the new yuan currently bucks conventional economics. To keep the yuan-exchange rate unchanged, the central bank issues short-term debt instruments to buy back the new yuan from banks, keeping banks from pumping the yuan into the economy and kindling inflation. But the People's Bank of China doesn't give the market much power to determine the interest rate on those bills, maintaining for itself control over the exchange and interest rates. The situation wasn't much of a problem until prices started to rise, because deflation made any rate of interest worthwhile. But now, prices are picking up, in conjunction with a huge upsurge in foreign trade and investment during the past year that has sent U.S. dollars hurling into China at unprecedented speed. These factors together suggest the central bank should lift the rates it pays on the bills used to mop up the yuan or let the currency rise. But it isn't complying. Mr. Greenspan, the U.S. Federal Reserve chairman, hinted during recent congressional testimony that the unconventional lock-hold on both interest and exchange rates is China's root problem, when he said the situation is something "they'll have to address." China has a third lever it may pull to avoid overheating: rule changes. Beijing could, for instance, change its foreign-exchange policy to make it easier for Chinese companies to buy dollars, increase government imports or even allow Chinese to invest more overseas -- all of which would reduce U.S. dollar inflows and thus inflationary pressures, economists and central bankers say. Write to James T. Areddy at james.areddy@dowjones.com1