It’s somewhat amusing (although I’m not sure that’s the right word) that developments in the world’s second largest economy have been relegated to the back burner lately.
As Donald Trump and Peter Navarro will be more than happy to remind you, the COVID-19 epidemic began in China, and it was the Chinese economy which arguably suffered the most jaw-dropping collapse.
That’s a somewhat subjective, anecdotal assessment, but what I hope to convey is the following. With the exception of US jobless claims and the April NFP report, the 6.8% contraction in the Chinese economy would arguably be the single most astonishing data point if you could somehow travel back in time to December and deliver a “This Is Our Future” Powerpoint presentation to market participants.
Fast forward a few months from the worst of the downturn, and the Chinese economy is on the mend, both according to China (who you can’t always depend on to deliver a completely objective, fact-based assessment) and accounts from sources other than Beijing.
For example, chatter from market insiders suggested oil demand in China had recovered nearly to pre-virus levels weeks before Beijing seemingly confirmed as much with oil import figures for May.
Of course, all is definitely not well. China abandoned their GDP target for 2020, and the incoming data continues to be noisy, at best.
One problem is external demand. China was “first in, first out” when it comes to the pandemic, so now, the outlook for exports is only as good as the global reopening push allows it to be. Throw in renewed trade tensions with the US and a spat with Australia, and you’ve got a somewhat precarious situation. And that’s to say nothing of the Hong Kong drama.
Meanwhile, domestic demand will presumably be hamstrung by the lingering effects of the virus.
Data out Wednesday showed the country sinking further into factory gate deflation. Producer prices fell 3.7% in May, representing the swiftest deceleration in more than four years.
CPI, meanwhile, rose just 2.4% during the month as a surge in food prices continued to abate.
As ever, PPI deflation is a particularly vexing problem for China, as it eats into industrial companies’ profits, which plunged in the wake of COVID-19.
Profits bounced back to fall just 4% YoY in April from 34.8% in March. One wonders if the rebound will now be imperiled by worsening producer price deflation, which could weigh on bottom lines, even as the effects of the virus fade.
Some observers point to a plunge in imports in May as evidence of lackluster domestic demand, and while there’s truth in that, it’s worth noting (as I did here last weekend) that some of the drop is down to falling commodity prices.
Meanwhile, credit creation in May came in reasonably strong data out Wednesday showed. Aggregate financing was 3.2 trillion yuan against expectations for 3.1 trillion, while new yuan loans for the month were 1.48 trillion, slightly less than expected.
The data was somewhat ambiguous, which is actually fine right now – the PBoC still seems a bit reticent when it comes to showing its hand, although the central bank did launch a kind of “soft QE” earlier this month.
You can expect more gradual rate cuts in the months ahead, and I would also note that the dollar’s recent dive is another part of this puzzle.
“Policymakers are doubling down on targeted easing methods for only those in great difficulty, which is just another reiteration of its unwillingness to flood the economy”, SocGen’s Wei Yao said last week. “While we still think that the central bank will have to offer more RRR cuts and general interest rate reductions, the introduction of new instruments is likely to suggest less scope than previously anticipated”.
