China's developing economic recovery would not raise overall commodity prices, Morgan Stanley's chief economist for Greater China said?Wednesday.
Wang Qing told a media roundtable that the prices of staple goods would remain low as the global economy was still only at the stage where policy makers had managed to avoid a situation parallel to the Great Depression of the 1930s.
Interpreting recent price hikes for gold, non-ferrous metals, oil and grains as an "adjustment of relative prices," Wang said that the genuine driving force for inflation -- price hikes from an overall demand increase -- was nowhere in sight.
"The rising prices mirror the ongoing global economic recovery and will not hinder the overall recovery process," Wang said.
As the global economic structure hasn't changed during the crisis, the rise of emerging markets such as India and China and their reviving appetite for resources would inevitably push up commodity prices. But at the same time, their growing productivity also pushed down the prices of industrial products.
Such an adjustment in relative prices reflected the scarcity of staple goods relative to industrial products. Since distressed selling had kept a firm lid on prices during the crisis, the commodities market needed a reasonable rebound, Wang said.
As a bullish commodity market restrained only the economies that grew by a small margin before the crisis, Wang said that some countries would be hurt by rising commodity prices, but that situation wouldn't stop a global recovery.
INFLATION NO IMMEDIATE CONCERN
In general, he said, inflation would not become a concern in the next 12 months for the Chinese, U.S. or global economy.
Likening the market argument over inflation or deflation to the rivalry between Milton Friedman and John Maynard Keynes, Wang said that it was understandable for staunch followers of Friedman to think that credit and money supply growth would result in inflation sooner or later.
This correlation would break down, however, based on Keynesian Theory, he said. That theory stated that when an economy was catastrophically hit by a financial crisis, inflation couldn't surface when market demand was weak and the output gap was massive, he said.
Citing records dating back to 1997, when the Asian financial crisis began, Wang said that the Chinese economy, in particular, had seen an interesting correlation between price drops and export declines.
The previous two bouts of deflation, after the Asian crisis and the 2002 dotcom collapse, both followed plunges in exports.
"As the current export and price drops are the worst ever, it has been difficult for us to imagine the risk of inflation," Wang said.
NO HOUSING BUBBLE
Regarding the housing recovery as the "most inspiring development" in the Chinese economy, Wang brushed aside concerns of a bubble and said he saw the housing market as a significant gauge of the health of the Chinese economy.
The Chinese economy was past the worst, which was in the fourth quarter of last year if judged by chain growth or in the first quarter if judged on a year-on-year basis.
The fastest-paced quarterly recovery would occur in the first quarter of 2010, Wang said.
As historic data show that the expansion of new floor area would lag housing sales growth by six months, while loan growth would lead fixed-asset investment by six months, Morgan Stanley held that more housing demand would emerge in China.
To make a sound assessment of China's economy during the second half of the year and into next year, Wang advised paying more attention to the supporting role of real estate in the economy.
He said there were clearer signs that the government had found a "sustainable business model" to address the property problem.
As the government was developing subsidized low-income apartments together with commercial housing, Wang said jokingly that the government had finally learned to "walk with both legs."
A thorny problem facing China's housing industry, Wang said, was that the market had brought wealth disparities, which were rare during the years of the planned economy, out into the open in only a few years.
"That has had a heavy impact on the general public and emotionalized almost every academic discussion of housing bubbles," he said.
As the weakening of the housing market was mainly caused by the tight monetary policy adopted on Jan. 1, 2008, policy changes after the crisis had eased the credit environment for realtors and helped end the "buyers' strike" during which many consumers postponed their home purchases until prices fell.
KUDOS TO CENTRAL BANKS
Despite warnings from academia to many central banks about inflationary risks, Wang said central banks, including the U.S. Federal Reserve Board and the People's Bank of China, should be given credit for having raised inflation expectations when actually, the economy faced unprecedented deflationary pressure.
"Without a sufficiently high inflation expectations, the global economy could hardly emerge from the shadows of economic depression. That proves the validity of central bank policies," he said.
"The past rapid expansion of the Chinese and global economy was an overdraft on the future. The Great Depression was a way to make up for an earlier overdraft, but in a catastrophic way.
"Contemporary policymakers who grew up with Keynesian Theory and macroeconomics are seeking to contain a catastrophe at the price of some inflationary risks. If we didn't need to take any inflationary risk, the crisis would not be anywhere close to the Great Depression of the 1930s," he said.
The ideal and most likely outcome in the next five or six years, according to Morgan Stanley's forecast, would be slower growth but higher inflation. Specifically, the growth of the global economy would drop to 1 percent to 3 percent annually, while that of the Chinese economy would slow to 7 percent to 9 percent annually from rates exceeding 10 percent.
The inflation rates for both China and the world would rise to 3 percent to 5 percent.
(Xinhua News Agency June 18, 2009)
