Inflation versus Income Growth: which is winning in China?
Mar 13th, 2008 by trevelyan
I don’t run many regression analyses these days, but the economist in me can’t help but feel a sense of schadenfreude at the recent economic troubles in the West. I think this is mostly because the problems with subprime loans and the housing market have been fairly obvious since 2005 and there’s no excuse for competent investors to lose billions of dollars.
That being said, I won’t join the chorus slamming Bernanke for throwing emergency loans at Wall Street. It would be nice if there were a way to force financial institutions to realistically appraise their paper-based assets, but I can’t see it. Which leaves the United States and those of us who depend on it’s continued existence lucky that American monetary authorities don’t subscribe to the same sort of zero-inflation zealotry that wreaked havoc on Canada in the early 1990s, especially now that sane fiscal policy is AWOL and Bernanke and the Fed are the only things left between us and illiquid lending markets.
Given that Fed-fuelled liquidity is flooding into commodities markets worldwide and aggravating China’s institutional problems with inflation, I was interested to run across two statistics on the Chinese economy last week that provide some rough endposts for figuring out how inflation is playing out against growth where it really matters: the pocketbook of ordinary people here. The first statistic involved the cost of real estate, which is now apparently a 30 year investment measured in monthly rental costs. To put that figure in perspective, this number was around 14 years in the United States prior to the 1990s and climbed to 20 or so during the recent housing boom. Real estate is really expensive here!
China doesn’t have the same problem with subprime loans that the United States does for obvious reasons: there aren’t any low-income mortgage products in the country. This basically makes housing ownership the reserve of the upper-middle class, or those whose legacy housing has been provided or subsidized by their danwei. Since there is not much of the latter happening these days, most ongoing real-estate investment is being made by the upper classes or by major corporations who’ve clued into the reality that building real-estate - even useless and unoccupied real estate - is a great way to increase corporate book value.
With flooding liquidity and rising energy costs pushing up inflation, this all leads to a pretty fundamental question: which is rising faster in China, the real income of the people or price inflation? According to 厉无畏, an economist with the Shanghai Academy of Social Sciences, we now have some figures on inflation levels in 2007 that set a baseline for figuring this out. Li suggests that inflation was:
4.8 percent in commodity prices
7.8 percent in consumer prices
I’m skeptical that the figures are actually this low since local papers are reporting inflation rates in the double-digits, and pork has soared by as much as 60 percent. Increased oil prices are also pushing up transportation costs significantly. That being said, here’s the annotated Xinhua article for those who like to read government news as close to the source as possible. And regardless of the actual figures, the important thing is really the number against which we have to set this figure: nominal growth in income. The authorities are reporting a 6 percent increase in per capita income in rural areas, and 12 percent nominal gains for urban residents.
What do I think? If these numbers are remotely accurate, they’re really not that very far apart, especially when you realize that wage growth is going to be lagging behind income growth. My instinct is that rural communities are already falling behind, and that urban communities are getting ahead, but that inflation is significantly underreported nationwide and that a lot of the income gains are tied directly or indirectly to unsustainably high prices in real estate.
UPDATE: just found this before going to bed. Claims GDP growth of 8% per year and CPI growth of 8.7% per year. Pretty depressing.
