WAL-MART in China is not quite like Wal-Mart elsewhere. Its stores sell live turtles and toads. It is happy for its staff to join a union. And in Kunming, a southern city in which Wal-Mart has six shops, the company, as well as several of its competitors, must now report and justify any price increases to the government 48 hours in advance.
This policing of prices is part of China’s unorthodox fight against inflation, which is running at more than 4% a year. Rising prices are also discomfiting Asia’s other developing economies (see chart). Policymakers in the region still fret about a repeat of the autumn of 2008, when the financial crisis struck. But a greater threat is a reprise of the spring and summer of that year, when commodity prices soared.
In India (where Wal-Mart is confined to a joint venture in wholesaling), Pakistan, Bangladesh and Vietnam, the battle against inflation has been raging all year. In Indonesia, ground is being quickly ceded, as consumer prices rose by 6.3% in the year to November. Elsewhere, inflation is still modest by the standards of emerging economies. But pressure is building. Since June farm prices have risen as fast as they did in 2007 and 2008, although they have not yet risen as far. And HSBC’s Asia Business Index, which draws on surveys of purchasing managers in the region, shows price pressures in Asia (excluding Japan) at their highest for at least a decade.
The source of this inflation is much disputed. Some blame bad weather, such as the October floods in China’s Hainan province, which damaged crops and helped raise food prices. Others blame deluges of a more metaphorical kind: floods of capital from abroad or floods of lending at home. Indonesia’s central bank, for example, has stopped selling three-month notes, which yield-hungry foreigners were eagerly snapping up. It is also thinking about reintroducing a cap on rupiah accounts held by foreigners, the latest in a series of dykes, bunds and culverts designed to control flows of capital. Even as inflation has crept up, the central bank has refrained from raising interest rates (which have not changed for 16 months) for fear of attracting more inflows. In this way the fear of foreign capital may be a bigger economic danger than the foreign capital itself.
This reluctance to tighten monetary policy faster has allowed private credit to grow by more than 20% a year in Bangladesh, Vietnam and India. “With benefit of hindsight it would now appear that liquidity support may…at times have been overly generous,” the central bank of Bangladesh admitted in its half-yearly statement. In China, banks were supposed to expand their loan books by no more than 18% (7.5 trillion yuan, or $1.1 trillion) this year, but they look likely to breach that limit. On December 3rd the Politburo of the Chinese Communist Party said it would pursue a “prudent” monetary policy in 2011, having followed “a moderately loose” policy this year. That has been interpreted to mean credit growth of perhaps only 14% in 2011.
Asia’s policymakers remain “paranoid about growth scares from the West,” argues Sean Darby of Nomura. They do not want to repeat the mistake of 2008, when they were caught tightening even as the financial crisis struck. But Asia’s economies have returned to normal rather faster than its monetary policies. In emerging Asia as a whole, industrial production has caught up with its historical trend, almost as if the Great Recession never happened. And even as America and Europe are exporting pessimism to Asia’s policymakers, they are import!ing goods from its factories. America’s economy, for example, grew by only 1.7% at an annual pace in the second quarter, but its import!s grew by 33.5%. Goldman Sachs describes this as the “biggest trade drag in US history”.
Not only have America’s import!s bounced back faster than its output, its import!s from Asia have recovered faster than its purchases from less fortunate parts of the world, points out Frederic Neumann of HSBC. This may be a new phenomenon, as cash-strapped shoppers turn to more affordable Asian products. Or it may be a cyclical one: Asia’s component-makers often prosper in the early stages of the Western business cycle, as companies rebuild their inventories in anticipation of brighter sales to come.
Now that inventories are better stocked, American firms may be less eager buyers. Goldman Sachs is expecting America’s growth to remain steady, but its import!s to slow. That will take some of the steam out of Asia’s exports, which may already be levelling off. Taiwan’s November shipments, for example, look impressive in comparison with a year earlier (up by more than a fifth), but they have shrunk a little since the spring. Asia’s exports may be peaking, then, even as inflation is gathering strength. With luck, the former problem will help solve the latter.