“Some of us sell-side macro commentators might be more predisposed to hyperbole than others.”
So said SocGen’s Albert Edwards — undisputed (and unapologetic) grand champion of sell-side hyperbole — while editorializing around China’s efforts to keep the world’s second-largest economy out of deflation.
A few days ago, SocGen’s China economics team described the latest CPI and PPI data out of Beijing as indicative of “deepening deflationary pressure.” On the sell-side, that counts as mild hyperbole.
But Wei Yao and Bloomberg favorite Michelle Lam “are solid through and through,” as Edwards put it, employing a little self-deprecating humor to distinguish between his colleagues’ analysis and his own, which often features “hyperbole, mixed metaphors and other grammatical and chart crimes.” (Albert’s too hard on himself: His grammar is actually quite good.)
For those unaware, Chinese consumer prices spent the last six months teetering precariously on the brink. Producer prices are mired in a 14-month run of deflation.
November’s figures showed CPI slipped 0.5% YoY, more than double the decline consensus expected, while the PPI gauge fell 3%.
That’s not a good thing in the Chinese context. Officials are struggling mightily to revive domestic demand. Falling consumer prices suggest the Party’s failing on that front.
This is a highly sensitive subject. So sensitive, in fact, that if you’re an analyst on the Mainland and you work for a Chinese bank or investment firm, you’re advised not to talk about it too loudly. Or at all.
Edwards doesn’t operate out of Mainland China and even if he did, something tells me he wouldn’t heed official guidance when it comes to avoiding the unmentionable. “Back in August, the Chinese authorities sought to dissuade leading Chinese economists from even mentioning the dreaded D-word,” he wrote Tuesday, adding that “in the Alice in Wonderland world of Chinese statistics… Pan Gongsheng [said] inflation was expected to be ‘going upwards.'” (Pan replaced Yi Gang at the PBoC earlier this year when Xi decided to reconstitute the dual-role setup at the central bank wherein the same person is Party secretary and governor.)
China, Edwards went on, is grappling “with excess debt, excess capacity and the consequent ever-deepening deflation, especially in consumer goods.”
In an unusual turn (which I imagine was somewhat disappointing for all the tabloid-style web portals which rely on Albert to produce monetizable bearish soundbites), Edwards suggested China’s deflationary woes may be a good thing. At least for the West.
“Prices of Chinese imports into the US are already falling sharply, which will drag down US goods prices and core CPI,” he said.
Of course, the “sticky” inflation in the US is on the services side, but the Fed’ll take all the help it can get. A disinflationary tailwind from outright deflation in China would be just as welcome as any other disinflationary impulse.
If you’re looking to conjure an out-of-consensus macro narrative for the US in 2024, you might suggest, as Albert did on Tuesday, that the combination of a hard landing and “an extra slug of [imported] Chinese deflation” could trigger a sharp decline in domestic price growth that catches the Fed entirely off guard. “At least US bond investors would be delighted,” Edwards quipped.
He also begged pardon to his fans. “I do apologize if regular readers are shocked that I might see a silver lining in China’s grey deflationary cloud rather than the usual hellfire and brimstone about to rain down on our heads,” he wrote.
