[Vnbiz] Not on Vietnam but may shed light on the inflation debate....a readers rsponse from

[Craig Stevenson]

Hi all:

Thought this might be of interest and shed some light on the inflation
debate.

It is a readers response to a posting on China Financial Markets by
Dr/Professor Michael Pettis who, essentially teaches future Chinese
Investment Bankers.
The site for Dr Pettis' blog is: http://www.piaohaoreport.sampasite.com/

Bio on Dr Pettis:

**

*Michael Pettis *is a professor at Peking University's Guanghua School of
Management, where he specializes in Chinese financial markets.  He has also
taught, from 2002 to 2004, at Tsinghua University's School of Economics and
Management and, from 1992 to 2001, at Columbia University's Graduate School
of Business.   He is a member of the board of directors of ABC-CA Fund
Management Co., a Sino-French joint venture based in Shanghai.



Pettis has worked on Wall Street in trading, capital markets, and corporate
finance since 1987, when he joined the Sovereign Debt trading team at
Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001,
Pettis worked at Bear Stearns, where he was Managing Director-Principal
heading the Latin American Capital Markets and the Liability Management
groups. He has also worked as a partner in a merchant banking boutique that
specialized in securitizing Latin American assets and at Credit Suisse First
Boston, where he headed the emerging markets trading team. Besides trading
and capital markets, Pettis has been involved in sovereign advisory work,
including for the Mexican government on the privatization of its banking
system, the Republic of Macedonia on the restructuring of its international
bank debt, and the South Korean Ministry of Finance on the restructuring of
the country's commercial bank debt.



Pettis is a member of the *Institute of Latin American Studies *Advisory
Board at Columbia University as well as the Dean's Advisory Board at the
School of Public and International Affairs.  He is the author of several
books, including *The Volatility Machine: Emerging Economies and the Threat
of Financial Collapse* (Oxford University Press, 2001).  He received an MBA
in Finance in 1984 and an MIA in Development Economics in 1981, both from
Columbia University.



Anyway his post was discussing rising concerns over inflation and issues
related to monetary policy and a reader wrote the following:

 *"The tug of war between monetary alarmists and pro-growth members is by no
means over. The pendulum will swing back to pro-growth once China's
leadership realizes the alarming extent to which Asia's growth engine is
sputtering, and that China has no special immunity to the accelerating
regional fallout.

Clearly, the impact of the slowdown in the US macro-economic scene combined
with the deepening debacle in US credit derivative markets, is beginning to
have a more pronounced impact on Asia. The breadth and extent of the
negative fallout was completely underestimated by Asian leaders, and is much
greater than is simply reflected by the action to date in equity markets.

(Significantly, today every single one of the 33 sector indexes within the
broader Topix Index posted a loss for the day. The share price of China
Merchant Holdings, owner of stakes in China's five largest container ports
plunged by (-) 7.5%, leading the Hang Seng to a (-) 3.3% loss for the day
with every single stock in the 43 stock index posting a decline. Beijing
Capital Land, China Overseas Land, and Gaungzhou R & F properties...three of
the top mainland property developers, all fell by more than (-) 4% following
brokerage house downgrades to the Chinese real-estate market, on the back of
a decline in housing starts and home prices.)

The suggestion that deflation in the US Housing and mortgage/credit
derivatives market would not spill over into the high-flying Asian markets
was a product of wishful thinking at best.

Foreign (i.e. US) investors were huge sellers of stocks in Taiwan this
morning, with net capital outflow from equities hitting 13.5 billion Taiwan
dollars, following net selling of more than 5.3 billion on Friday.

Asia collectively is now experiencing slowing growth in exports, industrial
output, and GDP growth, accompanied by disinflation in money supply growth,
along with intensifying appreciation in almost every Asian currency relative
to the dollar.

Moreover, inflation indicators throughout Asia reveal an upside acceleration
in price pressure, despite the slowing export-output-GDP growth. Stagflation
is appearing everywhere, spilling outward from its primary source (the US
economy) secondary to hyper-easy Fed monetary policy, worsening deflation in
the US housing market as well as within US consumer's balance sheet, and in
terms of the global rise in commodity prices.

The Bank of Japan released January's macro data revealing a worrying
CONTRACTION in the monetary base, sliding back into deflationary territory.
Current Account Balances declined, taking the year-year rate of contraction
to (-) 14.4%. The number of new job applicants rose to 577,400 versus
Decembers 398,800 while the number of job offers plunged to (-) 11.4% yr-yr.
Japan's Purchasing Manager's Index also turned down while the CPI hit its
highest level in a decade during December and January. The Nikkei's 2 year
exp-ma has reversed to the downside.

Korean import prices rose to a (+) 21.2% yr-yr basis in January as compared
to August 07 rate of (-) 0.7% when the Fed first began easing monetary
policy in response to the credit crunch. Despite the Won's appreciation and
rising exports, Korean trade balance has now turned from running a
longstanding surplus to a deficit due to import price inflation. Korean
equities appear on the brink of a technical breakdown below the 52 week
exp-ma.

In Hong Kong there has been a notable erosion within the money supply
trajectory and bank lending data. Although still nominally positive, what is
important to note is that the trend has reversed. Both money supply and
equities are caught up in disinflation.

Money supply in Taiwan has experienced an outright contraction/collapse in
January. Despite deflation in the money supply and appreciation in the
currency, Taiwan's wholesale price inflation is soaring, hitting double
digits rates.

In Thailand, import growth has exploded to a new all time high on a yr-yr
basis at nearly 50%, causing the country's trade surplus to vanish and turn
to a deficit, just like South Korea's. Despite a strong currency, rising
import prices have pushed Thailands CPI significantly higher, thus
indirectly resulting in negative real interest rates, triggering the Baht to
soar even higher....putting further downside pressure on the trade balance.
The central bank dare not ease for fear of exacerbating the upward pressure
in CPI.

As Asian currencies appreciate against the dollar they will
eventually/inevitably reach new historic "reverse crisis" levels. Whereas in
1997-98 export contraction and currency depreciation threatened to unleash
disinflationary dominance in commodities, the reverse weakness in the USD
and exploding Asian import dynamics will unleash hyperinflationary forces in
the commodity sector, something that China is well on her way to
experiencing.

Lastly, consider the case of Singapore. M2 Money Supply growth rate has
reversed, CPI is rapidly rising reaching a (+) 6.6 % yr-yr despite
significant currency appreciation. Singapore's "official" overnight rate is
1%, thus real interest rates are a deeply negative (-) 560 basis
points........but even this is not enough to support the stock market. In
the face of rising inflation, slowing export growth, and the slowdown in the
money supply expansion the market has fallen below its 52 week exp-ma and
roa.

Soon the monetary alarmists in China will see that strength in Asian
currencies, slowing money supply growth, a downturn in export growth,
soaring import price inflation, eroding trade balances, and downside
reversals taking place in output and GDP growth threaten far worse negative
consequences than they ever imagined (the least of which is placing Asian
equities in danger) and will reverse course once again*."

By kevinfischer2002 - Tue, 04 Mar 2008 03:55:34 GMT

Not sure if this helps to clarify some issues or confound others but, where
possible, enjoy,

Craig
-------------- next part --------------
An HTML attachment was scrubbed...
URL: http://mail.saigon.com/pipermail/vnbiz/attachments/20080304/07df40f1/attachment.html