Quantitative Easing

China could be the answer to Janet Yellen’s ‘mystery’



The “mystery” of Treasury Secretary Janet Yellen may be about to be solved.

When she headed the Federal Reserve, Yellen marveled at the failure of inflation despite low unemployment, years of low interest rates and several rounds of quantitative easing.

Claudio Borio, a senior official at the Bank for International Settlements, likened the situation to looking through a mirror: Central banks that once struggled to stifle inflation then found themselves trying to lift it. He and Mark Carney, then governor of the Bank of England, also spent some time investigating.

At least part of the answer, they believed, lies in the globalization of labor markets. It didn’t matter what the neighboring factory paid the workers or charged for their products; the key was what the competitor or supplier was doing on the other side of the world.

When people like Borio and Carney talked about the entry of over a billion workers into the workforce since the Cold War, they were basically talking about China. The country’s economy had grown so big, such a big exporter and such a big manufacturer that it was keeping prices low from Sydney to Seattle. China has become a powerful disinflationary current in the world economy.

This force is now dissipating. China’s labor market is shrinking, according to the latest census. Beijing is working to increase its population and said on Monday it would ease restrictions on family size further, allowing couples to have three children.

Domestic inflation is accelerating and there are signs that companies are absorbing high raw material costs rather than passing them on to customers, the kind of pressure Western companies face when dealing with competitors. at low prices in Asia.

Managers are also concerned with knowing how to handle an appreciating currency. A stronger yuan would tend to counter inflation, but the central bank is reluctant to allow too much up front too early for fear of creating asset bubbles.

Ex-factory prices in China jumped 6.8% in April from a year earlier, the largest increase in more than three years. Consumer prices rose 0.9%, slightly less than expected, but the largest increase since September. Beijing insists that the impact of commodity prices on the national economy will be limited and that price growth remains manageable. Still, officials have pledged to tighten controls on the commodity market to reduce costs for businesses.

Policy makers are right to be concerned. Companies are not fully passing on the impact of price increases and some profit margins are reduced, according to David Qu of Bloomberg Economics. “If commodity prices start to cool, the cycle could end without China passing on the full impact of rising input costs to the rest of the world,” he wrote recently. “If the arrow persists, the shock absorber could break.”

In some ways, the concerns of Chinese officials are similar to those of the Fed, the European Central Bank and the BOE. They are trying to examine recent movements and determine to what extent this reflects a natural rebound in the decline in activity caused by the COVID-19 pandemic.

Last year was the worst for the global economy since the 1930s, and while China recovered faster than other major players, its contraction in the first three months of 2020 was the first since decades.

The Fed says much of the rise in inflation is likely to be “transient,” a view echoed by the heads of many central banks. If they are wrong, interest rates may have to rise faster than expected, upsetting the markets and potentially delaying the recovery. At the People’s Bank of China, officials are wary of overheating and exacerbating financial imbalances, but likely recognize that economic growth will slow after hitting around 8% this year.

The central bank is also sobered by the experience after the global financial crisis, when Beijing spent lavishly on public works. The stimulus contributed to stable growth at home and abroad, but left excess debt that companies had to contend with for years.

China is no longer easily caricatured as a place with an unlimited supply of cheap labor producing commodities for consumers and businesses around the world. Does this mean that inflation is about to take off in earnest and reach the highs threatening the economy of the late 1970s? Unlikely. But that’s no longer a foolish proposition either.

When current Fed Chairman Jerome Powell – or his successor – charts the path to higher interest rates, he may not find himself struggling with the same thriller as Yellen. And for businesses in the American Midwest or northern England that have complained for years about being undermined by China, the idea that Beijing is facing rising costs and its own rust belts might be welcomed. with a certain degree of schadenfreude.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies.

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