China inflation


23 Oct 2013.

The inflation rate in China is moderate, running at 3.1% as of Sep. The food inflation rate, particularly relevant for the poor, is worse, at 6.1%.


23 Oct 2013. Data through Sep 2013.

The following shows both the main, all-items, Consumer Price Index, and the sub-index for food. The common wisdom that food drives the main index is consistent with the close parallel between the two lines.

(See Sources below.)

To put this in a longer-term context, Econompic provided, on 11 May 2009, a longer-term view of the all-items CPI change year-over-year:


See also

Clippings below were used in the construction of this page

China unit labor costs not going up

29 Sep 2007. Economist p76.

[Chart shows wages rising 2000 to 2006, but unit labor costs dropping.]

Price controls and higher reserves

16 Jan 2008.

“China Tells Banks to Set Aside Bigger Reserves (Update2). Li Yanping and Nipa Piboontanasawat”

“China imposed price curbs on meat, eggs and cooking oil and ordered banks to set aside larger reserves to try to reduce inflation from an 11-year high.

The top planning agency said it will vet price increases after soybean oil climbed 58 percent and lamb rose 51 percent this month from a year earlier. The central bank ordered lenders to set aside 15 percent of deposits, the highest ratio in at least 20 years. The announcements were on their Web sites.

The government is imposing price freezes and curbs on money-supply growth after inflation soared to 6.9 percent in November. Deaths and injuries in food stampedes underscore the risk of social unrest, reviving memories of the Tiananmen Square protests of 1989, partly triggered by rising prices.

``Inflation is always politically a very sensitive issue and the government wants to be perceived as on the people's side,'' said Mark Williams, an economist at Capital Economics Ltd. in London.

The reserve ratio jumps 0.5 percentage point, effective Jan. 25, removing about 190 billion yuan ($26.3 billion) from the financial system. It's the 11th increase since January last year. ”

Background on money supply measures in China

21 Oct 2009. Morgan Stanley.

“Worried About Inflation? Get Money Right First. Qing Wang”

“There are two popular indicators of money supply in China: M1 and M2. However, neither provides a precise measurement of the money as defined by the ‘quantity theory of money', in our view. Compared to many other countries, the definition of M1 in China is too narrow and rather unique, in that it only includes cash and demand deposits by enterprise and does not include demand deposits by households. While the definition of M2 in China is de jure broadly in line with the international standards, it is de facto too broad to be considered as representing ‘purchasing power used for transactions'. Here is why:

Reflecting the underdevelopment of capital markets as a result of ‘financial repression' for decades, a large part of households' deposits at banks - that comprise the M2 - are actually long-term savings (or a form of financial investment) instead of for transaction purposes, and therefore do not represent actual and perhaps even potential purchasing power. This is the key reason why China's M2-GDP ratio is 193%, one of the highest in the world. And Chinese households' deposits account for about 85% of GDP, while their financial exposure to the stock market only accounts for about 25% of GDP.

When the long-term saving component of M2 is stable, the change in M2 primarily reflects the change in money supply/demand for transaction purposes. However, when the long-term saving component becomes unstable, the change in M2 will not necessarily reflect the change in money supply for transaction purposes, and drawing implications of the change in the headline M2 growth to the inflation outlook could become rather tricky and even misleading, in our view.

This has certainly been the case in China in the last 4-5 years. The Chinese stock market has undergone a rapid and profound development in recent years and become a meaningful asset class into which Chinese households are actively seeking to diversify their financial portfolio that has long been dominated by bank deposits. This has led to an unstable relationship between the money supply and CPI inflation in recent years, as the change in the headline M2 growth is influenced by the vagaries of households' bank deposits as a result of a massive rebalancing of households' financial portfolio between cash and stocks. Specifically, when the stock market rises, households' deposits (and thus M2) tend to decline and vice versa.

To get the measurement of money right in China for gauging the inflation outlook entails estimating the underlying household deposits that are free from the influence of the stock market and for transaction purposes only. To this end, we run a regression with households' deposits as dependent variables and nominal GDP as an independent variable and use the fitted value from the regression equation - which can explain about 97% of the variation of the actual household deposits - as a proxy for the household deposits that are used for transaction purposes. The difference between the headline households' deposits and the fitted value can therefore be viewed as a proxy of households' deposits for investment purposes. (In this context, strictly speaking, the households' bank deposits for investment purposes should be interpreted as a deviation from the historical average amount of households' bank deposits for investment purposes.)

The portion of households' bank deposits for investment purposes is heavily influenced by the stock market performance: when the stock market rises, households' bank deposits tend to decline and vice versa.

After pinning down the portion of household bank deposits for investment purposes, we adjust the headline M2 to estimate the ‘true M2' that reflects transaction purposes only. And it is the change in this part of M2 that should have direct implications on inflation. Indeed, the true M2 growth demonstrated a much closer correlation with CPI inflation than the headline.

Of particular note, despite the record-high headline M2 growth of about 29%Y in 3Q09, we estimate that the true M2 growth was only about 20%Y, which is substantially below the recent peak of 26%Y reached in 3Q07. Note that, back in 3Q07, the headline M2 growth was only 18%Y.

What explains these large discrepancies between the headline M2 and the true M2 growth rates? First, despite the seemingly well-behaved headline M2 growth in 3Q07, the overall demand for money has actually declined sharply, because households chose to buy shares over holding cash in the form of bank deposits. As such, the underlying money supply significantly outpaced money demand, as is reflected in the rapid increase of the underlying true M2 growth, generating strong inflationary pressures (we first discussed this topic in China Economics: Tighter Policy on Structural Shift in Money Demand, July 3, 2007).

The situation so far this year is just the opposite: despite the rather strong headline M2 growth since 4Q08, the underlying overall demand for money has actually increased sharply, because extreme caution and risk-aversion amid ‘the most severe financial turmoil since the Great Depression' has caused households to hold cash over buying risk assets. As such, the underlying money demand may have outpaced the supply of money, as is reflected in the not-so-rapid increase of the true M2 growth in 3Q09. In conclusion, the strong headline M2 growth overstates the true underlying monetary expansion, as it fails to account for the change in M2 caused by the shift in asset allocation by households between cash and stocks.

The true M2 growth is estimated to be about 20% in 3Q09. While this is much lower than the headline M2 growth and thus less alarming, it still looks quite high judging by the historical trends of the true M2. Looking at the relationship between true M2 and CPI would make one wonder whether a repeat of the episodes of high inflation during 2003-04 and 2007-08 cannot be avoided. Alternatively, could we expect a repeat of the situation in 2000-01 where inflationary pressures were quite moderate despite relatively high true M2 growth? To this discussion, we turn next.”

China rate increases

19 Oct 2010. Bloomberg.

“China Raises Benchmark Rates for First Time Since 2007”

“China unexpectedly raised its benchmark lending and deposit rates for the first time since 2007 ahead of data that may show inflation accelerated to the fastest pace in almost two years. Stocks and commodities fell.

The one-year lending rate will increase to 5.56 percent from 5.31 percent, effective tomorrow, the People’s Bank of China said on its website today. The deposit rate will increase to 2.5 percent from 2.25 percent. ”

Summary of inflation-fighting measures

16 Nov 2010.

“China eyes price controls to fight inflation. By Geoff Dyer”

“The National Development and Reform Commission, China’s main economic planning body, is putting together a “one-two punch” of policies to limit food inflation, state media reported on Tuesday, in a sign that debate is breaking out over how to tackle rising prices.

Several major cities in China have announced plans to try to cap food prices, while two officials in Beijing also confirmed this week that the government was looking again at price controls.

Consumer price inflation rose to 4.4 per cent in October, well above the government’s 3 per cent target, after food prices increased at an annualised rate of 10.1 per cent over the month. …

High inflation is potentially very damaging in China because as well as being a possible spark for political unrest, it could also encourage speculative investments by Chinese depositors who are currently receiving negative real returns on savings in the banking system.

In the face of mounting inflationary pressures, Beijing has already increased interest rates once and raised reserve requirements for banks on several occasions. Fuzhou city on the south-east coast announced price caps last week on four types of vegetable, while Kunming in the south-west has also announced price controls on vegetables.

The average price of 18 staple vegetables was 62.4 per cent higher in the first 10 days of November than over the same period the year before, according to a report by the Xinhua news agency on Monday.

The average price of the group of vegetables, which includes cabbage, cucumbers and potatoes, increased to Rmb3.9 ($0.59) per kilogramme. Garlic, which has been the subject of some speculative buying according to analysts, was up 95.8 per cent over the year before, while the price of ginger was 89.5 per cent higher, the report said, citing the Ministry of Commerce.

According to a report in the China Securities Journal, the measures being examined, in addition to price controls, include subsidies for consumers, a crackdown on hoarding food and other commodities and a policy of making city mayors responsible for the price of a set basket of goods, although it gave no details about how such a system would work.

Andy Rothman, an economist at CLSA in Shanghai, said that when the authorities announced a package of price controls in 2008 during a previous spike in inflation, they actually intervened very little in product markets. “It was a way of applying some psychological pressure on companies,” he said. “The primary objective of the government’s recent measures has been to make a political point that the Communist party is doing everything it can to avoid food prices going up too.”

Yao Jian, a spokesman for the Chinese Commerce ministry, said the government was releasing stockpiled supplies of pork and sugar to ease price increases, while it would also take steps to increase vegetable production.”

China selling food from reserves to contain inflation

China measures on food inflation

1 Dec 2010. FT

“Beijing acts on surging food prices. By Leslie Hook and Robert Cookson”

“In the first two weeks of November, the average retail price of 18 types of vegetables rose 62 per cent year-on-year, according to the ministry of commerce. …

Policymakers have responded with raft of measures to address escalating prices. A series of co-ordinated announcements over the past week has sought to boost supply – for example by allowing vegetable trucks to travel toll free on highways – and reassure the public that food prices will not keep rising.

Government ministries are pitching in. The banking regulator is trying to boost loans to agricultural projects. Representatives of the State Council, China’s cabinet, are traversing the nation on a food-price inspection tour, and the agriculture ministry is issuing optimistic updates on the planting of winter wheat.

“What the government has been trying to do so far is . . . control inflationary expectations through propaganda,” says Arthur Kroeber, managing director of Dragonomics, a Beijing research firm. China’s civil affairs ministry has ordered local governments to step up welfare payments to ensure the poor can afford food.

Beijing is handing out one-time subsidies of Rmb100 ($15) to more than 220,000 low-income workers. In Shaanxi province, the government has set aside Rmb60m to help university dining halls cover costs.

These efforts, combined with a crackdown on speculation in futures markets, and rising expectations of tighter monetary policy seem to have had their intended effect, with futures for traded agricultural commodities sliding during the past two weeks.

The National Development and Reform Commission says anti-speculation measures have succeeded. It posted a list of price falls for commodities including corn (down 6 per cent in two weeks), cotton (down 24 per) and sugar (down 14 per cent) on its website.”

Basket of goods changed

15 Feb 2011.

“China inflation hits 4.9%. Leslie Hook and Geoff Dyer”

“The National Bureau of Statistics reweighted the CPI starting this year to put less emphasis on food and more on the cost of property and services. Although some private sector economists suggested this might have explained why the index was lower than expected in January, the NBS said that the recalculation of the index actually caused the headline figure to increase modestly.

China’s CPI basket is updated every five years and was due for revision this year, although the exact contents of the basket are not fully revealed.”

Definition of M2 altered

21 Mar 2011. FT Alphaville.

“China's missing M2”

“According to the latest data from the People’s Bank of China, M2 growth slowed to 17.2 per cent in January and 15.7 per cent in February, year-on-year. …

We believe that the stock of outstanding loans and deposits has undergone an adjustment at the start of the year. …

If you’re wondering what M2 growth would’ve been like without the alleged accounting change, StanChart figures it to be 17.4 per cent in February.”

Definition of M2 altered

16 Nov 2011. People's Bank of China.

“Statistical Coverage of Broad Money Supply M2 Expanded”

“On November 11, 2011, PBC released Financial Statistics of October 2011. As media report and the general public have talked a lot about it, further elaboration is thus necessary and is given here as follows:

Money supply is the stock of all the money in the economy, which equals the total amount of financial instruments that can be used for payment and settlement at a certain point of time. With the development of financial market and innovations of financial instruments, countries have adjusted and improved the coverage of their money supply statistics. As deposits of non-deposit-taking financial institutions in deposit-taking financial institutions and the deposits of housing provident fund are already in substantial volume and have relatively large impact on money supply, the PBC has decided to include these two categories of deposits into the statistics of broad money supply (M2). Financial Statistics of October 2011 released on November 11 has explained the expanded coverage in its Note 3.

Based on the expanded coverage, M2 posted 81.68 trillion Yuan in October 2011 and 72.35 trillion yuan in October 2010, representing a y-o-y increase of 12.9 percent. That is, (81.68-72.35)/72.35*100%=12.9%.”