If you ask SocGen’s Albert Edwards — a man who knows a thing or five about deflation — moribund price growth in China isn’t getting the attention it deserves in macro circles.
I generally agree, although it’s hard to say for sure. Like Edwards, I routinely suggest economists, “market participants” and the perpetually derelict (in my telling) “mainstream financial media” are ignoring or otherwise giving short shrift to the issues which “really matter.” Spoiler alert: That’s part of my shtick, folks. I hope most of you realize that.
I don’t have a proprietary device for measuring the “appropriate” amount of attention or concern, so when I deride “the media” or accuse “market participants” of failing to appreciate this or that, see it for what it is: I’m positing a discrepancy between usually unnamed, oblivious somebodies and all-knowing me for the purposes of setting up an article. Such a discrepancy may or may not exist. I have no idea. How would I? I’m not an LLM. Who’s to say, on any given day, whether “the media” or “economists” have or haven’t made sufficient mention of a given topic? ChatGPT maybe. Not any human.
A lot’s been written lately about deflation in China and while I’m inclined to concur with Albert when he says, as he did Thursday, that “China taking up the Ice Age baton is not receiving enough market attention,” readers need to understand (and stop me if you’ve heard this before) that most macro commentary and market color is entertainment. “Everyone’s oblivious but me” is shtick. It serves a purpose, but you shouldn’t take it literally whether it comes from me, Albert or anybody else.
Anyway, if you know Albert you knew he was going to comment on China’s GDP update. Recall that the headline print was a meaningful beat at 5.3% against Bloomberg consensus of 4.8%. As I put it in the minutes around the release, “There are too many caveats to list, not least of which is that we’re talking about an economy flirting with deflation.” I continued: “China’s growth figures are even less amenable to straightforward interpretation these days than usual.”
On Thursday, Edwards delivered a similar assessment. “Don’t be fooled that all is well in China just because Q1’s 5.3% GDP outturn topped expectations,” he wrote, adding that “Everybody in the markets knows this data point is more about presentation than accuracy.” (Note the irreconcilable discrepancy: This is, apparently, something that “everybody in the markets knows” but yet somehow “is not receiving enough attention.” I run into that contradiction all the time. For me, it takes the form of claiming Bloomberg’s clueless only to cite Bloomberg a few paragraphs later.)
The figure above captures the main point of contention between (maybe oblivious, maybe attune) market participants and China’s hopelessly beholden statisticians.
Edwards suggested the deflator (which, by the way, you have to impute because the NBS won’t publish one) “just doesn’t square with other data.”
The important point is this: The real growth figure (i.e., the headline GDP prints against which China and markets measure the Party’s success or failure) is “easy to ‘manipulate,'” as Albert put it. If Xi wants a stronger print, the NBS can just “lowball the deflator.”
Six months ago, Edwards spelled this out in excruciatingly explicit terms. To wit:
It is the nominal pulse that is accurately measured. Then, after statisticians make some informed guesses as to what prices are doing, ‘real’ constant price GDP pops up in the spreadsheet. Hence for China to meet its 5% ‘real’ GDP target merely requires the statisticians to ‘assume’ prices are falling sharply. Call me a cynic, but [some recent] upside surprise[s] on [China’s] real GDP [were] effectively only achieved because of the surprisingly sharp fall in the GDP deflator that was then added to weak nominal GDP growth.
There’s nothing especially complicated (or necessarily nefarious) about this, but considering the source (i.e., the NBS in Beijing) it’s fair to suggest the implicit asterisk next to media headlines touting China’s quarterly GDP prints isn’t large enough. In that regard at least, the media almost surely doesn’t accord this enough attention.
For those of you wondering whether this is just another example of Edwards putting ominous spin on something innocuous, the answer’s “no” in this case. Although Edwards’s missives are always tongue-in-cheek to a greater or lesser degree, don’t confuse the issue: He does know what he’s talking about.
Coming full circle, it’s impossible to say whether “the market” is or isn’t worried enough. But I do think Albert’s right to suggest investors “seem to think problems in China will be contained, just as they did for deflation in Japan in the 1990s.” That wasn’t a safe assumption for Japan. It probably isn’t a safe assumption for Xi’s China either.
