The stock market rally finally stopped today. After trading up most of the day, by over 1%, the SSE Composite lost its legs in the last hour of the day to close at 2876, down 1.54% for the day. I guess the main reason for the fall was the release of trade numbers, which suggest that export growth is slowing sharply. The trade surplus for the month of June was $21.3 billion, compared with $20.2 billion in May and $26.9 billion in June 2007. I suspect the real trade surplus would be even lower if there were some way to strip out speculative inflows hidden in the invoicing of trade transactions. Here is what today’s Bloomberg says:
Overseas shipments grew 17.6 percent from a year earlier, the slowest pace in four months, after gaining 28.1 percent in May, the customs bureau said on its Web site today. That was less than the lowest estimate of 23 economists surveyed by Bloomberg News.
Predictably, this has caused renewed calls for a slowing down of RMB appreciation and a loosening of (what they still call) “tight” monetary conditions. I won’t do the broken record routine and explain why I think this is a mistaken interpretation of the causes of the export slowdown (which has far more to do with a slowing global economy and rising wages in China, neither of which will be positively affected by looser monetary conditions) and is a potentially costly mistake, but I will say that it is going to be harder than ever for the monetary alarmists to maintain their already-weakening grip on policy. My favorite source on the politics of Chinese finance is Victor Shih, a professor at Northwestern, and he has this to say on his blog:
What we see today is nothing new, and as my book points out, has occurred repeatedly in the past 20 years. Even Li Yining’s call for “acceptable inflation” is not new. He made exactly the same argument in 1988 when inflation was nearly 30%. The problem is that Hu Jintao now has many followers serving as provincial party secretaries, and they are lobbying Hu not to squeeze money supply so hard. Thus, unlike a few years ago, when Hu supported Wen’s inflation fighting effort, Wen now fights inflation alone. I think this is a very dangerous situation for future inflation trends in China.
