George Chen

By 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.

Given the big picture for globalization nowadays, the rate rise in Europe will certainly have an impact on a variety of domestic sectors in China. I believe your inbox will soon be full of research notes from investment banks helping you analyze the impact, so I won’t elaborate here.

But I do have a question for China, and maybe for Europe, too. Can rate increases really help China and the world solve the inflation problem? What we learned from the G20 meetings is that a key problem to solve  is global imbalances and there are some “imbalance indicators” that China already rejected. From a microeconomic perspective, such imbalances refer to the income gap, which rate increases don’t really help.

According to a Reuters poll of leading economists and analysts in China this week, the country is expected to see at least one more rate increase and the central bank is likely to raise banks’ required reserve ratio three times this year, possibly as soon as this month. Nevertheless, most analysts polled said it would still be a challenge for Beijing to keep its pledge and stop inflation rising above 4 percent.

This week is certainly a very busy week for China and the global market. Just one day after China’s central bank increased its benchmark lending and deposit rate on Wednesday to help curb inflation, the government announced it will raise gasoline prices by 500 yuan per tonne and diesel by 400 yuan per tonne from Thursday.

According to some research notes, after the newest gasoline price hike, retail prices for No.93 gasoline, the most commonly used type in China, is 7.79 yuan/liter, and the price level is expected to rise over 8 yuan in the coming months and may hit 10 yuan or exceed 10 yuan by the end of this year.

That is to say Chinese drivers will soon pay more for gasoline than their counterparts in the United States. Is that the price must China pay to be the world’s No.2 economy, and the price that Chinese consumers should pay for?

The news has not gone down well with everyone. One Chinese netizen on Sina Weibo, the Twitter-like mini blogging service, which is very popular in China, joked: “My feeling is that I just happened to pick up 1 yuan on the street, like a beggar, and then I was robbed 100 yuan by a policeman.”

Some analysts are starting to wonder if China’s inflation is starting to get out of control and many banks like Goldman Sachs now estimate China’s March Consumer Price Index readings will exceed 5 percent. And considering that the government felt the need to hike the gasoline price tax, April’s data may look even uglier, possibly heading toward 6 percent in terms of growth on year.

The rate hike won’t cool off growing public angers on rising property prices in China either. Most ordinary Chinese have to face the reality — if you’re not rich, you just can’t afford to buy, even if the central bank raises interest rates 10 times a year. And those who are rich don’t care how much mortgage rates are raised, they can pay in cash.

Don’t just blame China — almost the same thing is happening in the West. A friend in Paris told me prices had risen more than 50 percent from last year for some downtown properties — even faster than in Shanghai and Hong Kong.

Let’s talk about noodles again, which are certainly far more affordable to buy than a flat. If such day-to-day products are cheaper in Hong Kong than most places in mainland China, what about traveling to Hong Kong to buy your necessities if you earn Chinese currency yuan, which is growing stronger than the Hong Kong dollar, which is pegged to the U.S. dollar? If you live in the nearby southern Chinese boomtown of Shenzhen, this is already happening.

In the global battle with inflation, everybody has their own way of dealing with the situation. So I will keep going to my university for the cheap (and delicious) noodles. What about you?

George Chen is a Reuters editor and columnist based in Hong Kong. He’s also a part-time post-graduate student, studying international relations at the University of Hong Kong.

Photo: Chinese spicy rice noodles I bought in the canteen of the University of Hong Kong on April 7, 2011. Reuters/George Chen

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.

Yesterday, Minsheng Banking Corp Chairman Dong Wenbiao told the media he believed the stock market, especially listed banks, under pressure since late last year from monetary policy tightening, should see some good days soon.

The simple investment logic behind his optimism? “Because the government is tightening the property market, but there’s still too much money in the market. When people are unable to buy property, they will choose to buy stocks again,” he told the official Guangzhou Daily.

Both Xiao and Dong gave their comments during the ongoing annual parliamentary meeting in Beijing. Bank of China is one of the Big Four state lenders. Minsheng Bank, the country’s No.7 bank by assets, is China’s first non-state lender with strong business links to local private businesses.

It may be unfair to say they are overconfident because this political summit in Beijing is exactly the time they must give expressions of firm confidence in China’s economic outlook.

Otherwise, why bother flying into Beijing for the meetings? Isn’t this all about boosting confidence? Not only for the public but also China’s leaders themselves?

George Chen is a Reuters editor and columnist based in Hong Kong.

By 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.

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 next month. 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 bank 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 learning to perform a similar role. What’s your say?

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: China’s central bank governor Zhou Xiaochuan answers a question at a news conference during China’s annual session of parliament, in Beijing March 6, 2010. REUTERS/Jason Lee