Beijing Fears Inflation

The Wall Street Journal reports that Beijing's new worry is importing inflation.

(emphasis mine) [my comment]

JULY 29, 2009
New Beijing Worry: Importing Inflation
By TERENCE POON

BEIJING -- Inflationary pressures from abroad and at home are likely on the rise in China as the economy recovers, the central bank said, in its first direct reference to the risk of higher prices since the global financial crisis hit.

But the People's Bank of China signaled no reversal of its moderately loose monetary policy stance, aimed at spurring growth in the world's third-biggest economy.

The comments on Tuesday were the bank's clearest read this year on the prospects for inflation after China's economic growth accelerated in the second quarter. The bank said the consumer-price index, its key inflation gauge, is likely to bottom out at the end of the third quarter.

Inflationary worries and possible asset bubbles have been flagged in recent weeks by policy makers since lending exploded, with new yuan loans in the first half of the year totaling 7.4 trillion yuan ($1.08 trillion), equivalent to about half of the country's gross domestic product in the period.

The loan growth has spurred calls by economists for the central bank to fine-tune its loose policies.
The PBOC cited "imported inflation," where domestic prices are pushed up by higher prices of imported raw materials, as another factor that could add to price pressures in China. After falling 1.1% in the first half of 2009, the CPI will stabilize in the second half and possibly rebound, the bank said.

"Commodity markets around the world have bottomed and are rebounding, raising imported inflation pressures," the PBOC said in a report analyzing second-quarter economic trends, issued by its Financial Survey and Statistics Department. "At the same time, domestic demand continues to rebound, liquidity remains flush and inflation expectations are surfacing."

China's producer-price index, which can be a leading indicator for CPI, is affected by the movements of international commodity prices. During China's last inflationary cycle, when CPI peaked around the first half of 2008, the central bank began to gently nudge the yuan higher partly to offset imported inflationary pressures.

The Wall Street Journal reports that the US, in nod to china, will sell more TIPS.

AUGUST 6, 2009
U.S., in Nod to China, to Sell More TIPS
By ROB COPELAND and MAYA JACKSON RANDALL

The Treasury Department, responding to growing demand from China and other investors, will boost the sale of inflation-protected bonds that hold their value as consumer prices rise. [This is a disaster waiting to happen]

"We continue to hear growing demand for the product," Treasury Deputy Assistant Secretary for Federal Financing Matt Rutherford said at a news conference announcing the plan on Wednesday.

The decision to increase sales of Treasury Inflation-Protected Securities, or TIPS, is part of a broader effort to ensure there is enough demand for Treasury bonds to help the U.S. finance its swelling budget deficit. The Treasury already has issued a record amount of debt in the past year, and the department said Wednesday it will sell a record $75 billion next week.

In particular, Treasury officials need to ensure demand from China, the largest holder of U.S. government debt. Last week's auctions of fixed-rate notes saw lukewarm demand from China and other investors. Chinese officials had indicated they want inflation-protected securities, especially as the U.S. economy starts to recover.

"Inflation is the No. 1 worry," said Marc Chandler, global head of currency strategy for Brown Brothers Harriman & Co. "This is the government saying, 'We will take that inflation risk away from you.'"
[Leaving only default risk].

La Times reports that Amid inflation fears, U.S. will boost issuance of 'TIPS'.

Amid inflation fears, U.S. will boost issuance of 'TIPS'
6:00 AM, August 6, 2009

If higher inflation is on the horizon, bond investors will have more opportunities to hedge that risk: The Treasury says it expects to issue more inflation-protected bonds in the fiscal year beginning Oct. 1.

The government has been selling Treasury Inflation-Protected Securities, or TIPS, for more than a decade, but they're still a small part of Uncle Sam's total debt. That makes sense, because inflation hasn't been much of a concern -- so the app etite for bonds guaranteed to earn returns that keep up with inflation hasn't been huge.

There were $532 billion of TIPS outstanding at the end of June, accounting for just 8% of the $6.6 trillion of Treasury debt held by the public.

But "market participants can expect [TIPS] issuance to gradually increase" in the new year, the government said Wednesday in its quarterly statement on future borrowing plans.

The timing isn't a coincidence: The Treasury knows that many potential buyers of U.S. bonds -- including China -- fear that inflation could surge given the massive sums the Treasury and the Federal Reserve have pumped into the financial system since last fall.

My reaction: Chinese authorities fear inflation.

1) Inflationary pressures from abroad and at home are likely on the rise in China as the economy recovers

2) The PBOC is worried about "imported inflation," where domestic prices are pushed up by higher prices of imported raw materials.

3) Chinese officials have indicated they want inflation-protected securities, especially as the dollar begins to collapse.

4) The Treasury Department, responding to growing demand from China and other investors, will boost the sale of inflation-protected bonds that hold their value as consumer prices rise.


Conclusion: If the Chinese are concerned about inflation, then you should be too.

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