China's is overheating. Consumer prices in aggregate rose at an annual rate of 4.4% as of October. Food prices are up 10.1 percent according to China Financial Daily.



Moreover, accelerating inflation is hurting profit margins in China's service sector. China's non-manufacturing PMI fell to a nine-month low in November, with new orders in consumer service industries showing outright contraction.



In response to these inflationary price pressures, China declared a shift to a "prudent monetary policy", including price controls at Walmart.



This begs the question: Since when do price controls constitute "prudent policy"? Price controls have never worked in history and this time will be no different.



This is a pretty long post, but please stay tuned until the end for an analysis of Multiple Simultaneous Games of "Chicken".



Topics include a comparison of monetary and credit growth in the US vs China, a look at the problems in Japan, a detailed look at various games of "chicken" central banks play with each other, and a detailed look at various games of chicken that speculators play with the market.



To fill in the details however, we need to start from the top with a look at China's overheating manufacturing sector.



Chinese Manufacturing Growth Accelerates



To date, interest rate hikes have not yet have any effects on industrial output. China's latest PMI survey shows Manufacturing Growth Accelerates



China’s manufacturing grew at a faster pace for a fourth straight month in November, indicating the economy can withstand higher interest rates as price pressures escalate.



The Purchasing Managers’ Index rose to 55.2 from 54.7 in October, China’s logistics federation said on its website today.



Cement prices have climbed to a record, the state-run China Daily reported today. Consumer prices may have climbed 4.8 percent in November after October’s 4.4 percent gain, which was the biggest in 25 months, according to China International Capital Corp.



Spot prices of power-station coal at Qinhuangdao port, a Chinese benchmark, rose to a two-year high this week.

Service Sector Contraction





China’s non-manufacturing purchasing managers’ index fell to a nine-month low in November as accelerating inflation eroded service companies’ margins.



The index dropped to 53.2 from 60.5 in October, according to a statement today by the Beijing-based National Bureau of Statistics and the Federation of Logistics and Purchasing. A reading above 50 indicates an expansion. A separate service PMI released by HSBC Holdings Plc fell to 53.1, a near two-year low.



“Inflationary pressure has started to show a negative impact on service expansion,” the logistics federation said in today’s statement.



The non-manufacturing measure encompasses business and consumer services as well as construction and real estate. The non-manufacturing new-order index fell to 50.1 last month from 56.3 in October, and new orders in consumer service industries indicated a contraction, with a reading of 47, today’s data show.

Shift to "Prudent" Monetary Policy

China will switch to a prudent monetary policy from a moderately loose stance, the Communist Party's top leaders decided on Friday, a change that could pave the way for more interest rate increases and lending controls.



At the same time, the Politburo elected to maintain China's proactive fiscal policy, an indication that the government wants to continue to ramp up investment spending even while taking tightening steps to control inflation.



"It means that all sorts of monetary policy tools to control liquidity and to control inflation can now be used," said Ken Peng, an economist with Citigroup in Beijing.



"In the past we've been clearly focusing on administrative measures. Going forward we could be using more price adjustments via interest rates," he said, adding that he expected five rate increases by the end of next year.



China Places Price Controls on Wal-Mart

The southwestern Chinese city of Kunming, where Wal-Mart Stores Inc. and Carrefour SA have operations, has imposed temporary price ceilings on daily necessities to counter inflation.



Kunming’s government asked five retailers -- three non- Chinese, one Chinese and one based in Hong Kong -- to report any price adjustments and give reasons for the changes two days in advance of making any alterations, the National Development and Reform Commission’s local branch said on its website yesterday.



Besides the five companies, other food, cooking-oil and beverage producers are requested to apply for government approval 10 working days before making price changes, the statement said.



The city government also imposed temporary price ceilings on daily necessities in major parts of the city starting from yesterday to the end of February, according to the statement. Prices of grain, cooking oil, meat, eggs, milk and noodles are to be kept at levels before Nov. 17, the statement said.



The city limited retail prices of vegetables, depending on type, to 40 percent to 100 percent higher than wholesale prices, the statement said.

Price Controls Never Work

Grains

Metals

Crude

Chicken

Economics Junkie

M1 in China







M1 (China) vs TMS1 (US)





Domestic Credit Contraction in US

US banks are reluctant to lend

US businesses and consumers are reluctant to borrow

Banks are capital impaired and do not want to lend

Chargeoffs exceed new loans



Credit Up by 9.3 Trillion Yuan

China's credit growth this year has not slowed materially from the rapid pace in 2009 despite headline data pointing to a slowdown, Fitch Ratings said in a report yesterday.



The rating agency said that Chinese banks have been off-loading trillions of yuan in loans this year by artificially reducing their holdings of discounted bills and by re-packaging the loans into investment products for sale to investors.



The report came on the same day that China said it would change to a "prudent" monetary policy in 2011 from a "relatively easing" stance.



According to the report, the balance of Chinese banks' discounted bills was understated by as much as 1.65 trillion yuan (US$250 billion) at end of the third quarter.



A discounted bill is an accepted draft against which a loan is made and the interest is deducted immediately. Through the action, bill holders can acquire cash before its maturity date at lower rate. It could be a channel for companies to get capital while bypassing the loan quota.



Banks held more than 2.5 trillion yuan (US$375 billion) in credit not reflected in their balance sheets in wealth management products at the end of November.



"Adjusting for these factors, the amount of new credit extended through the end of the third quarter was on par with the 9.3 trillion yuan extended in the same period a year ago," Chu said. "Credit conditions remain loose, which explains why inflation and property prices stay stubbornly high."

China's Credit Expansion is 28% of GDP

Credit Bubble on Borrowed Time







The Telegraph

The Telegraph

A Bit About Hyperinflation

Multiple Simultaneous Games of Chicken

Bernanke Plays Chicken with the Bond Market

Trichet Plays Chicken with the Euro

Australian and Canadian Chicken

Chicken Japanese-Style

is

Yuan Chicken

Crude Chicken



Investing Chicken

Chicken-Math

Collective Chicken

Chicken End-Game