China’s Pandemic Rebound Belies Two-Track Recovery

Most “regular” (and I don’t have a concrete definition of that) market participants likely didn’t have China’s inflation data on the radar screen this week, but it’s worth a quick mention on Wednesday.

The world’s second-largest economy recovered fairly rapidly from the pandemic which started on its soil, but one feature of that recovery (especially early on) was a divergence between industrial output and retail sales.

In short, factory activity recovered rapidly, while consumption lagged, before finally catching up. The figure (below) just shows China’s closely-watched monthly activity data. The dynamic briefly described above is clear enough.

January’s inflation data, out Wednesday, underscored the trend.

CPI, which turned negative for the first time since 2009 late last year as pork prices fell, turned negative again in January, falling 0.3%. On the other hand, factory gate deflation disappeared for the first time in a year.

While the CPI print was below estimates (consensus was for a flat read) it was well within the range. The positive PPI print was expected.

These trends are notable to the extent they underscore a broader narrative in China. Core CPI turned negative for the first time in more than 10 years.

This is indicative of a two-track recovery, where strength in industrial output and rising commodities prices finally managed to pull the country out of PPI deflation, even as lackluster domestic demand and ongoing concerns about virus containment, continue to weigh on the consumer.

Or at least that’s the generic version of the narrative, as told by an outsider.

CPI continues to be affected by falling pork prices, so that has to be taken into account. But apparently, a cold winter and a COVID flareup are combining to drive up food prices anew. “A logjam at ports is affecting the supply of China’s favorite meat as well as seafood as authorities demand inspections of all frozen food imports after traces of the coronavirus were found on food and packaging,” Bloomberg wrote last week, noting that the timing leaves something to be desired ahead of the Lunar New Year.

Rising factory prices in China may also presage exported inflation, which is something to keep an eye on given rising breakevens and steeper curves in the US.

On Tuesday, data showed the usual seasonal jump in credit creation. TSF was 5.17 trillion yuan and new yuan loans were a record 3.58 trillion.

M2 growth slowed, though, to 9.4% last month from a 10.1% pace in December.


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