CHINAMacroReporter

Q&A 4 | Is China Exporting Inflation?

'‘China has its own issues. If you look at the CPI inflation, it looks more moderate. ‘If you look at the producer price inflation, it looks more severe.’
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CHINADebate

December 30, 2021
Q&A 4 | Is China Exporting Inflation?
BIG IDEA | '‘China has its own issues. If you look at the CPI inflation, it looks more moderate. ‘If you look at the producer price inflation, it looks more severe.’
‘I strongly believe that central banks collectively are not looking at the right inflation. The exclusive focus is on consumer pricing inflation, and not much attention is given to producer pricing inflation ‘Or using producer pricing inflation only as a predictor of CPI inflation is insufficient. And I think that we are paying a price for that.’
‘Over the medium term, I expect central banks collectively will recognize the importance of directly incorporating producer price inflation as their intermediate targets. And that will lead to different kinds of monetary policy configurations. So that's a separate story.’
BIG IDEA | ‘Chinese wage inflation in RMB terms does not mechanically translate into inflation in the US in dollar terms; US inflation does not mechanically translate into other countries' inflation.’
‘This is adjustment mechanism they can keep the inflation in RMB from going out of the door, and vice versa.’
‘If you have a combination of flexible exchange rates and offsetting domestic macro policies, inflation won’t transmit mechanically across borders.’

Fund Manager: ‘After at least after 40 years of disinflation all the talk now is about inflation. Here are the questions I'm struggling with:’

  • ‘China is the bastion for manufacturing and production. So what do China wage inflation labor shortages mean for the world in terms of inflationary pressures?’
  • ‘And if the growth is slow in China, instead of exporting deflation is now exporting inflation, then are we in an era of stagflation globally?’

Shang-Jin Wei: ‘The price increases we see in the US are a combination of:’

  • ‘First, transportation/supply chain issues that cause prices in certain sector for certain goods rising much faster than others and,’
  • ‘Second, general price increases because we have just had essentially a decade of very loose money supply.’

‘So geopolitics tension, supply chain resilience, the Trump tariffs that are kept on the book also push up prices for some of the goods.’

  • ‘Price increases certainly can be helped by, for example, removing the Trump tariffs and, for example, by improving the transportation bottlenecks in the supply chain.’
  • ‘We'll have to keep track of these two sets of factors.’

‘But the central bank’s actions are also important.’

  • ‘Inflation will continue unless the Federal Reserve changes policies.’
  • ‘It doesn't matter what happens to China.’

‘China has its own issues.’

  • ‘If you look at the CPI inflation, it looks more moderate.’
  • ‘If you look at the producer price inflation, it looks more severe.’

‘I strongly believe that central banks collectively are not looking at the right inflation.’

  • ‘The exclusive focus is on consumer pricing inflation, and not much attention is given to producer pricing inflation.’
  • ‘Or using producer pricing inflation only as a predictor of CPI inflation is insufficient.’
  • ‘And I think that we are paying a price for that.’

‘Over the medium term, I expect central banks collectively will recognize the importance of directly incorporating producer price inflation as their intermediate targets.’

  • ‘And that will lead to a different kind of monetary policy configurations. So that's a separate story.’

‘They would potentially call for even sharper changes in US monetary policy and potentially an even bigger adjustment in the emerging market world in general.’

  • ‘But this probably will come my guess in the next few years.’

Malcolm Riddell: ‘What about the issue about the wage inflation in China and that causing greater inflation overall?’

Shang-Jin Wei: ‘In principle, that shouldn’t happen because the exchange rate will adjust.’

  • ‘Chinese wage inflation in RMB terms does not mechanically translate into inflation in the US in dollar terms; US inflation does not mechanically translate into other countries' inflation.’
  • ‘This is adjustment mechanism they can keep the inflation in RMB from going out of the door, and vice versa.’
  • ‘If you have a combination of flexible exchange rates and offsetting domestic macro policies, inflation won’t transmit mechanically across borders.’

Economist: ‘I agree with the emphasis that relative prices can absorb a lot.’

  • ‘And so you should always be careful about starting with any part of the factors that can affect some prices and then jump to a macroeconomic, saying, “This is disinflationary” or “This is inflationary.” ’

‘We like to use input-output tables a lot, and you can trace exactly which US prices are going to trace back to labor markets in China.’

  • ‘So we're going to start with goods, not services, that's only 30% of consumption.
  • ‘We're going to start with imported goods coming from China, another cut smaller, another cut smaller.’
  • ‘And then once we get to the goods in China, how much of the cost of those goods is coming from raw materials?’

‘Is value-added coming from the US maybe because it's an Apple product designed in the US? How much of it is really going to Chinese labor?’

  • ‘And if that cost rises, how much of that gets passed along?
  • ‘It's actually pretty small at the end of the day.’
  • ‘Using input-output type analysis is really useful for this.’

‘Actually, one thing we've picked up on interestingly, which is similar conceptually, is that with the weakness and the property sector in China, you can use input-output tables to say, who should this affect globally.’

  • ‘We found it’s not really Japan, the US, or Europe at all.’
  • ‘It's Southeast Asia; it's raw materials from Chile and Australia.’
  • ‘So sometimes some of these global transmission mechanisms are a little bit different from what people might expect at first.’

Shang-Jin Wei: Looking at the value-added share in Chinese exports and following these excellent remarks, there's a lot of huge variation across sectors.’

  • ‘In electronics, Chinese value-added share is especially low. For Apple products, it’s very low.’
  • ‘In other sectors, it will be higher.’

‘Using cross country input-output table information, we calculate it’s about 50%.’

  • ‘Bob Coleman, who's currently WTO Chief Economist, and I developed a methodology that can incorporate those input-output data systematically, so you can combine the trade data with GDP accounting.’
  • ‘So you can see there's a tremendous amount of differences or variations across sectors.’

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