“The spirits” were better Friday, as global equities attempted to trim this week’s losses ahead of two notable data points out of the US.
As has become custom over the past several weeks, speculation on the trajectory of the Chinese economy served as a convenient stand-in for new news, if you will. We could do worse, that’s for sure. China is important, after all.
Inflation figures out of Beijing were notable, even as the prints were in line with consensus. If you didn’t know any better, it’d be tempting to celebrate another month of producer price deflation in “the world’s factory” — that’d ostensibly bode well for the developed world’s ongoing struggles with consumer prices.
PPI fell 1.3% last month YoY in China, the same drop seen in October (figure below).
At 1.6%, consumer price growth was the slowest since March.
The list of caveats is long. Base effects were a big factor for PPI. In September of 2021, China was compelled to grapple with an acute domestic power crunch, alongside rising commodity prices. In October of 2021, factory gate prices surged the most in more than a quarter century. So, you have to consider the context when assessing Friday’s PPI data.
At the same time, subdued price growth in China in part reflects slowing demand, both domestic and abroad. That slowdown was thrown into stark relief this week by trade data which showed export and import growth contracted sharply last month. Core CPI printed just 0.6% for November.
What happens from here is, as ever, anyone’s guess. Ostensibly, PPI deflation and very low CPI inflation leave the door wide open for the PBoC to ease, and by all indications, that’s what they plan to do, as the Party shifts its focus to the economy in 2023.
However, as China lifts COVID restrictions, inflationary pressures will probably pick up. Domestic consumption should rise, and it’s not a stretch to suggest the world’s second-largest economy could find itself grappling with labor shortages (or at least a temporary mismatch in worker supply and demand) akin to those seen across the world’s largest.
Demand for credit should rebound, thus enhancing the effectiveness of monetary policy. That’ll be welcome, but easing aggressively into a “grand” re-opening carries risks — just ask any developed market central banker.
“The ‘natural’ policy response to an economy sliding toward deflation is vigorous policy stimulus [but] Chinese authorities will not want to repeat the mistakes of US and European policymakers whereby monetary financing of fiscal stimulus at a time of COVID-induced supply constraints caused inflation to explode higher,” SocGen’s Albert Edwards said. “They will surely be more cautious.
Apparently, officials “plan to play down” one of the Party’s trademark economic catchphrases at the annual Central Economic Work Conference this month. The go-to “housing is for living, not for speculation” talking point won’t feature as prominently as it has in the past, according to sources.
In any case, there’s a lot going on in China these days (on the off chance you haven’t noticed), which means a “clean” read on data out of the NBS is even more difficult to come by than usual.
The wild card is an expected surge in COVID cases across the country, most of which will go unreported under the new testing regime. If they’re asymptomatic, that’ll be fine. If not, not.
January 22 will mark Chinese New Year this year. It will be interesting to see if Covid is sufficiently managed to allow unfettered celebration. That would the perfect occasion for a “Grand Reopening,” but I think it’s likely hospital utilization will be at a point where officials continue to discourage major celebrations and travel for another year.