Opinion

George Chen

From noodles to gasoline, inflation is not just an issue in China

George Chen
Apr 8, 2011 05:42 UTC

noodlesBy George Chen
The opinions expressed are the author’s own.

These days I’m increasingly convinced that inflation is not just a China issue but a global problem and one that is becoming worse.

Yesterday when I posted a photo of rice noodles on my Chinese Twitter-like mini blogging account, I didn’t expect it would lead to quite such an active online discussion. I paid HK$16 (about US$2) for the bowl of noodles in the canteen of the University of Hong Kong (HKU). My friends from Geneva to New York to Shanghai “complained” that the price was way too cheap.

Well, the University Canteen is intended for students and I am indeed a HKU post-graduate student, part-time.

My friends in Shanghai told me a bowl of beef noodles costs about 30 yuan (US$4.6). In New York’s Chinatown, you might be charged US$4, according to a colleague, who is trying to break her daily Starbucks coffee addiction to save money in the Big Apple. Let’s face it — In many cases, a pay rise you receive won’t keep up with inflation these days. To address the problem, central bankers around the world — except the U.S. Fed — are apparently coming to a common understanding: that increasing interest rates is becoming a more realistic option.

The European Union is joining China to become the latest member of the international community to fight inflation via rate increases. The European Central Bank raised interest rates for the first time since the 2008 financial crisis on Thursday, signaling it is ready to tighten policy further if needed to help balance rising prices.

Chinese bankers, overconfident?

George Chen
Mar 11, 2011 04:07 UTC

By George Chen
The opinions expressed are the author’s own.

Are Chinese bankers overconfident? Or perhaps global investors are too suspicious of China?

A couple of days ago, Bank of China Chairman Xiao Gang dismissed growing market concern, in particular from the West, that a debt crisis could be brewing given the rising level of bad assets in China’s banking system.

Xiao said bad loans would be kept under control and he cited Chinese people’s “good tradition” of repaying debts to back up his argument.

Beijing debates the yuan

George Chen
Dec 30, 2010 06:06 UTC
There’s apparently growing debate in Beijing over the possibility of interest rate reform next year. The latest opinion was voiced by a senior central bank official, who said the government should lift the ceiling on bank deposit rates to help rein in accelerating inflation in the world’s second-biggest economy. Will this happen in 2011? It seems much more likely than the possibility of a fully convertible yuan anytime soon. “China should allow deposit rates to float upwards. It would gradually enable the market to price in expectations of interest rate rises,” Sheng Songcheng, head of statistics at the People’s Bank of China, said in an article published on the central bank website late on Dec. 29. “That would help change negative real deposit rates and curb inflation,” he added. If Sheng had published the article as a commentary in a local newspaper, it would more likely have been considered his personal opinion, but posted on the central bank’s website, the top headline on the front page no less, it’s certainly something to be taken very seriously. In my view, Sheng’s article was published not only for the market to analyze but also as a pitch to the top leaders in Beijing for more serious consideration. Beijing controls China’s interest rate market by setting a ceiling on deposit rates and a floor on lending rates. This protects banks from competition and ensures they have a decent interest rate margin, which is around 3 percentage points now — that’s partly why banking jobs in China are very popular and considered one of the most stable jobs, in particular with big state-owned lenders. Many people say working for a bank in China means you have an “iron rice bowl”. The interest rate margin provides a safe and stable channel of profit for banks. Whatever they do, they have the “3 percentage points” to make money. However, given that the rate is fixed by the central bank, it may also explain why local people often complain about the service they receive at big banks in China. How bad? You should consider it normal if you are stuck in a long queue for about 30 minutes or even an hour before you reach the teller. The central bank usually raises both loan and deposit rates, like the newest rate increase on Christmas Day, which leaves the profit margin of banks unchanged. If interest rate reform really takes place next year, we should see a lot of interesting stories about the banking industry. At least, I do hope more competition can bring Chinese financial consumers better service. In fact, any move towards a more market-oriented interest rate reform is not just about the banking industry. Such moves will also affect the foreign exchange rate of the yuan, which may well explain why some officials at the State Administration of Foreign Exchange don’t really like the idea of a free interest rate market. They say it may encourage more speculative money inflows to bet on faster yuan appreciation, making the foreign exchange regulator’s job more difficult or less important to some extent. Why less important? You might think they would be busier fighting a faster rising yuan. Yes and no — if you have some decent central bank sources in Beijing, you may come to know that there’s always a strange tension between the PBOC and the SAFE, similar to the tension between interest rates and the foreign exchange rate. I remember a SAFE official once privately told me that the day the yuan becomes fully convertible may be the same day the offices of the SAFE are closed. This may sound extreme but think — the SAFE’s job is to control the yuan, the more convertible the yuan becomes, the less controls you need. Then that will also affect many people’s jobs, promotions and even their political careers. Does this explain the unique relationship between the SAFE and the PBOC? Currently, the SAFE is one rank lower than the PBOC as foreign exchange regulation is considered a function of the central bank in China. The current head of the SAFE is Yi Gang. He is also a deputy governor of the PBOC and reports to central bank chief Zhou Xiaochuan. However, some SAFE officials believe SAFE should play a more important and independent role in making foreign exchange policy and related matters, given the significance of the yuan, which often has a major impact on China’s diplomatic relations such as the ties with the United States. To some extent, some market observers say the unique tension and internal bureaucracy between the SAFE and the PBOC actually serve to slow currency reforms and the internationalisation of yuan. So, who’s going to have the final say? The State Council, China’s cabinet led by Premier Wen Jiabao and President Hu Jintao of course. Hu is going to meet U.S. President Barack Obama next month and the two gentlemen will for sure touch upon the yuan issue. From all the signs I can see here, China is ready to let the yuan rise faster next year, so our American friends should be happier. In return, at least Hu deserves a better reception during his visit. Remember Hu’s last visit to the United States? It was not considered a very successful or happy trip by some political observers. Meanwhile, the yuan debate will continue at home, but this time The central banks seems determined to push forward interest rate reforms first to make Chinese people feel happy. Then Hu and Wen should be happy too. Some people say central bankers are the real politicians in China, and I sense their counterparts at the Federal Reserve are going to perform a similar role. Do you agree?

ZhouBy George Chen
The opinions expressed are the author’s own.

There’s apparently growing debate in Beijing over the possibility of interest rate reform next year. The latest opinion was voiced by a senior central bank official, who said the government should lift the ceiling on bank deposit rates to help rein in accelerating inflation in the world’s second-biggest economy. Will this happen in 2011? It seems much more likely than the possibility of a fully convertible yuan anytime soon.

“China should allow deposit rates to float upwards. It would gradually enable the market to price in expectations of interest rate rises,” Sheng Songcheng, head of statistics at the People’s Bank of China, said in an article published on the central bank website late on Dec. 29. “That would help change negative real deposit rates and curb inflation,” he added.

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