Sunday, July 10, 2011

Chinese Inflation

It's definitely high and increasing.  However, it's not as high as it got in 2008, and nowhere near as high as in the mid nineties.  (Source

Update: and here's interest rates.  The central bank has been raising them lately (presumably in a bid to cool an overheated economy).  Note however that with inflation running at 6%, real interest rates are still around zero (making it very attractive to borrow and build all manner of things).


Guillermo said...

Remember that "Interest rates" refers to the 1-year bank loan rate set by the central government. This is not the rate at which consumers on companies finance purchases, it is more representative of the CoC that the provinces, SOEs and central government. The private sector borrows at a significant spread.

Interest rates paid on 1-year deposits were also raised in this round, but rates paid on demand deposits weren't. Even with this rate, though, inflation is ticking up faster than real rates, and much faster than real deposit rates. Time deposit rates, being ~300bp lower than the loan rate are about -3% in real terms.

This basically means the depositors (primarily the household sector) is subsidizing borrowers (SOEs and central government) to the tune of at least 3% of the total size of the time-deposit base, plus ~3.5% of the demand deposit base, all while making the very generous assumption that the real cost of money is zero.

Stuart Staniford said...

Guillermo - right, but it's fair to say that banks, at least, face zero cost of capital in real terms, right?

Guillermo said...


My point is that banks have, in the worst case scenario, a -3.5% (real) cost of capital.