China gets better news as the Euro zone wonders who its lender of last resort is

9th November 2011 by Shaun Richards

Whilst the main stream media continues to focus on the machinations of the Euro zone I wish today to look at the consequences of what is happening in the Far East and in particular China. In contrast to the fears of an economic slowdown in Europe China has spent 2011 hoping for an economic slowdown as she battles inflationary trends and an economy that has grown so fast that it is in danger of overheating. Accordingly the consumer price figures for October were a signal of how things are progressing and these are the numbers from the Chinese statistics bureau.

In October, the consumer price index went up by 5.5 percent year-on-year. The prices grew by 5.4 percent in cities and 5.9 percent in rural areas.

So we see signs of some better news on this front as inflation fell back from the 6.1% of September. Although within the numbers we still see signs of an issue that contributed in my opinion to the Arab Spring and has caused unrest in China itself.

Food Prices went up by 11.9 percent year-on-year, contributing nearly 3.62 percentage points to the overall growth. Of which, the prices of grain rose by 11.6 percent, meaning 0.32 percentage point growth in the overall price level; meat, poultry and related products, surged 26.1 percent, contributing 1.72 percentage points (price of pork was up by 38.9 percent, contributing 1.12 percentage points); fresh eggs, up 12.6 percent, contributing 0.11 percentage point; aquatic products, up 12.4 percent, contributing 0.28 percentage point; fresh vegetables, dropped 6.8 percent, fresh fruits, up 11.1 percent, contributing 0.19 percentage point, grease, increased 15.8 percent, contributing 0.18 percentage point.

So we see that the price of food is still rising strongly albeit at a slighty reduced pace. This will impact on the poorest the most which is why I referred to the Arab Spring where we saw this effect be so bad that some were unable to afford to feed themselves. In the detail I noticed the rise in the price of pork, 38.9%. I am no authority on Chinese cuisine but my impression is that pork is used a lot…

Producer price inflation dips too

In October 2011, Producer Price Index (PPI) for manufactured goods declined 0.7 percent month-on-month, and increased 5.0 percent year-on-year. The purchasing price index for manufactured goods dropped 0.7 percent month-on-month, and soared 8.0 percent year-on-year.

I think whoever put “soared” as a translation into English is probably undergoing “extra training” right now!


Here we see price trends which are optimistic for the Chinese economy and give some hope for what is called a soft landing for it. If we look at consumer price inflation then it has now fallen from a peak of 6.5% and is now back to a the same level as in May. If we look down the price chain for future signs then we see that output producer price inflation has fallen back to an annual level last seen a year ago and we have just seen the first month on month fall (-0.7%) in 2011. It remains true that input producer price inflation is above its output equivalent but it has fallen too.

In addition we received news that China’s industrial output rose 13.2% on an annual basis in October down from 13.8% in September. China is one of the few places in the world that would welcome such news! So we see that here too the overheating problems may be declining a little. This contrasts considerably with the UK’s annual industrial production figures which were -0.7% yesterday which the media mostly ignored for some reason concentrating on a manufacturing improvement.

So in conclusion we seem to be seeing the hoped for slow down in China. Is this the mythical “soft landing”? That is harder to say but for no it seems good news but if we look for a fly in the ointment it may come from her banking sector. Here there are worrying reports that the Chinese government is pumping liquidity into her banks so she may be afraid of her economy slowing too much. Should that happen then in my opinion it is likely to have been caused by the way she has raised the reserve requirements on her biggest banks up to 21.5%. Regular readers will be aware that I have been critical of that part of the Chinese strategy as it has failed elsewhere in the past as it tends to work slowly meaning that the policy ratchet keeps being turned but then operates like a brick being fired from a piece of stretched elastic!

The price of oil

As we see that China’s economy continues to expand we may be seeing a partial reason to why the price of oil has not fallen as many have predicted. In response to today’s further Euro zone problems it has dipped to US $114.25 for a barrel of Brent Crude this morning but this is still up 5.2% in November. So my message is that commodity price inflation’s death is like Mark Twain’s much exaggerated!

Japan and her currency

In contrast to the generally good news from China this morning Japan is yet again facing a strengthening exchange rate for the Yen. It was only a week or so ago she intervened (again) to weaken it but it has rallied to 77.7 versus the US dollar and 106.8 versus the Euro.

Italy stares further into the abyss

When it was announced last night that Silvio Berlusconi would resign after the latest budget proposals were passed I put this message out on twitter.

Do we all actually believe that Berlusconi will resign or will he try to rally support instead?

It also appears true that there is no obvious candidate to replace him or at least one has not appeared so far. Italy’s bond market was on this in a flash today and the price of her government bonds has fallen heavily. In fact the yield curve out to the ten year maturity is virtually a straight line at 7%. This is significant for several reasons.

1. This has been a point of no return in the crisis for Portugal,Ireland and Spain.

2. The flattening of the yield curve is another ominous sign. The reason for this is that at the shorter end of her yield curve one can compare it for example with the official interest-rate of the European Central Bank which is now at 1.25%. So Italy’s two-year bond you could argue have a “credit risk” of 5.75% right now. This is a rule of thumb I use rather than a precise measure but I hope that the principle is clear.

Just to make a grim situation more difficult clearing houses have begun to raise the margin required for trading Italian government bonds. So this has also contributed to today’s falls as traders need more cash now to back the same position (roughly double for a ten-year bond at LCH Clearnet SA). As I type this we are getting ever closer to the main LCH Clearnet Ltd. raising its margins too as we are only 0.07% away!

Where is the European Central Bank?

I gather that it is buying today but yet again it is like the Texas cowboys at the Alamo. Having raised its peripheral bond purchases to 9.52 billion Euros last week it is going to have to do much more to have any serious impact. With his name the new head of the ECB was always going to acquire the moniker SuperMario but so far there is little or no sign of him living up to that.

Where is the European Financial Stability Facility?


Remember the boasts and hyperbole of a trillion Euros and maybe two trillion Euros? Well it struggled to raise a mere 3 billion Euros this week in spite of paying a lot higher interest-rate relative to the German bund benchmark. As it stand it is a busted flush.

What could help, the US Cavalry?

Remember the central bank foreign exchange liquidity swaps I explained and described not so long ago? Here is a link to the details.

Should matters deteriorate it is by no means impossible that the US Federal Reserve could in effect bypass the European Central Bank and become again the lender of last resort that it was in 2008. It would be very embarassing for both the ECB and Europe’s politicians but if contagion were to spread then the US Federal Reserve could easily become involved particularly if Europe’s response continues to be so ineffective.

A sign of Euro zone incompetence and ineffectiveness is the market in credit default swaps which appears to have survived their plan to destroy it. Will it get its revenge and destroy them instead? Actually for all the hype it appears to be too small to do that but we are in an “expect the unexpected” era.

The Bank of Greece wants to be a lender of last resort too

Currently the job of being lender of last resort in the Euro zone is a bit like the scene in the film Spatacus when loads og hands are thrust in the air to a chorus of “I am Spartacus!” It should be the ECB but as I have explained above there have been times when you might argue it was the US Federal Reserve and such a period could return quickly.

If you look at the sundry other assets section of the Bank of Greece which at the end of September expanded to 41.39 billion Euros then it too appears to think that it is Spartacus! As I have reported before so does the Central Bank of Ireland.

So there is my question for you today, who really is Spartacus?

10 thoughts on “China gets better news as the Euro zone wonders who its lender of last resort is”

  1. Italy’s Ten Year went from 6.76% yesterday to 7.47% today– 700pips. I think Bernanke would step in only as a last resort to save the Euro currency itself because of the sh!tstorm he’d catch back here for doing this. It would likely cost him his job, especially if a Repub wins the election. 

    It seems to me that only when Italy has a failed bond auction will Il Duce begin to understand things are bad enough to change. Unfortunately for him and his country, by that time it’s far too late. In the meantime, Berlusconi will continue to play political games to save his hide instead of applying the painful medicine needed. 

    1. Bkester says:

      Walt Kowalski, I agree with your remarks about Bernanke.  But, back to the wall, I think he’ll intervene anyway especially seeing that there can’t be a Republican President in office before January 2013 – an eternity away in politics.  However, if Shaun is still looking for Spartacus, I’d say the closest thing we have right now is the money-printing supervisor in Frankfurt patiently waiting for Berlin to cave in and deliver truckloads of paper and ink. Gold anybody?

  2. Anonymous says:

    Shaun re Chinese inflation. I seem to remember some while ago that either you or one of the commentators suggested that many of the numbers coming out of China have been “massaged”; how much faith can we place on those quoted? If today’s are valid, can we assume a “soft landing”?

    1. Drf says:

      Hi Ray_Fletcher, are Chinese numbers likely to be massaged any more than those of the UK?  Indeed are they likely to be massaged as much as the UK’s or US’s? Are any officially published numbers “valid” any longer, or as with the currency wars are they all racing to the bottom of credulity?

      1. Anonymous says:

        Drf – having read your response I must plead a large dose of naivete. You are, of course, absolutely right in what you say.

  3. Robert Silver says:


    As ever, thank you for an excellent blog.

    I know this is off topic, but as a non-economist, it’s rare that I read in the mainstream press how much the ECB has actually purchased over the last few years.  So I read with interest yesterday, in The Telegraph, that the ECB has bought, “The stated level of ECB intervention is €587bn for eurozone banks and €184bn in bond purchases.”.  Quite a large number and in fact over half of the €1 trillion that the EU wanted to raise!  Link to article:

    Finally, did you hear on Monday that the U.K. Treasury Select Committee wanted to curb some of the BoE powers?  Perhaps they’ve been reading your blog!


  4. JW says:

    Sparticus is female…Angie. Or failing that it has to be Ben.

  5. AlexWild says:

    Walt Kowalski, Bkesteri’m a lay man with my own amateur economist view that is Bernanke has no interest in saving the Euro.As all the currency’s race to the bottom, Bernanke wants the dollar to be on the top of the flat pile bolstering the dollar’s status as ‘the reserve currency of the world’ although it maybe worthless, its still the most valued of the pile..there are rumours that Gadafi sought a gold backed Dinar libyan currency and was interested in dealing with the chinese in a currency other than dollars for oil due to currency wars/ devalued dollar. This is muted by the ‘alternative media’ as the background reason why he needed to be removed. Mr Hussain of Iraq had also tried to do something along these lines prior to being wrapped up with 9/11 events even though Mr Bush stated publicly Iraq had nothing to do with 9/11. They invaded on the pretext of 9/11 attacks anyway.Presuming that if the Dollar, backed by nothing, was to loose its reserve status, America would be Zimbabwe.Bernanke sings in the bath ‘burn by babe burn, disco inferno’ in the context of the Euro.Anyway interesting times ahead.

    1. Anonymous says:

      Hi Alex

      My suggestion that the US Federal Reserve might ride to the rescue was not because I thought it would be altruistic but more because if the European banking system was to freeze up much more it would be indirectly protecting US banks by acting.

      Whilst it seems an outlier as a possibility it seems that whilst there is still some doubt over whether the European banking system is freezing up, there is much less doubt that its leaders will continue to fiddle while Rome burns (hopefully not literally).

      Also a side effect of all this today was a much stronger US dollar which is the reverse of one of Ben Bernanke’s (unstated) objectives.

  6. Anonymous says:

    Hi Robert and thanks for the compliment
    The actual levels of purchases that the ECB has made has been some 183 billion euros of peripheral government debt and 60 billion Euros of Covered Bonds. Both amounts are rising as it faces a daily battle in the Italian bond market where today it lost again and it plans to buy another 40 billion Euros of covered bonds.
    I have checked its money market operations and the various refinance operations come to 590 billion Euros. These should be less risk than the 2 programmes above but that is less risk and not no risk.
    We thereby get to my point that the ECB’s balance sheet is in a shocking state.
    Unfortunately the TSC are heading in another direction and seem to want to turn the Bank of England into a highly paid but ineffective Quango! I know that my idea has been sent to a Treasury Minister but if he takes as long to reply as my MP Jane Ellison took to pass it on (13 months) it may yet be a long wait!

Leave a Reply

Your email address will not be published. Required fields are marked *