East Asia Econ

Like last month, November data show a contrast between real weakness in some areas of the economy (such as property, goods consumption) and more stability in others (pricing, output). Overall, however, the balance is once again shifting towards more weakness.

Real economy developments still look negative for inflation. That the deflator nonetheless looks to be turning can be partly attributed to local food prices and global commodity prices. However, I think monetary factors are also playing a role, with three dynamics in particular worth highlighting.

Today's inflation data weren't surprising, with the big shift being food prices lifting CPI. Non-food prices aren't rising, but in level terms aren't falling either, which is an improvement from 1H25. Nominal growth should look better through Q126.

The weakness in exports of October reversed in November, with a rebound in growth to ROW, and shipments to the US stabilising. Auto shipments reached a new all-time high, and are growing as quickly this year as in the initial take-off in 2023-24. Import demand declined, so the trade surplus rose.

High-frequency data show upstream prices remained stable in November, while food prices have been rising. The combination points to a further lessening of headline deflation. I doubt that signals a real turn in nominal growth, though there are now some upside risks.

The official composite output PMI in November fell below 50. That wasn't because of FAI: the industrial PMIs were stable. Rather, it was weakness in services. That is puzzling. For now, the one concrete indicator from today's inflation is actually positive: deflation isn't getting worse.

The FAI data point to the economy hitting a wall. But price data don't bear that out. Indeed, upstream prices show the recent stability of PPI is likely persisting. That is also true for the demand:time deposit ratio. The cycle as a whole remains both weak and messy, but there are some green shoots.

The October data are soft, but mixed: on the one hand investment terrible and property weak, on the other, output and services more stable. That probably doesn't add up to a change in policy. My idea of stabilisation does look a bit more tenuous, and would be over if upstream prices give way again.

Relative to my idea that the underlying economy could be stabilising, today's monetary data for October are a little soft. In particular, both M1 growth and the M1:M2 ratio ticked down, and mortgage lending also slowed. Credit growth also dropped, but only because of less government borrowing.

CPI and PPI data for October show another lessening of deflation, and leads point to that trend being sustained through year-end. That is important, and fits with my idea of a bottoming for the underlying cycle. But I am not convinced yet, with services CPI inflation still too low.

Many explanations have been put forward for the drop in YoY FAI. I have another: YoY catching up with the weakness already clear in the MoM. That's tongue-in-cheek, but looking at the under-used MoM series for IP, retail sales and FAI add useful perspectives on what is happening in the economy.

China's exports, which had been so strong, were weaker in October. That could be the lagged impact of tariffs. The suddenness of the change suggests other factors are involved, but we'll find out more with next week's detailed data. For now, it is worth noting that auto exports continue to rise.

With the official manufacturing PMI dropping to a two-year low in October, it is clear China's cycle continues to struggle. The offset is the improvement in the S&P/RatingDog versions (at least through September), and the better CKGSB survey this month.

The PBC's quarterly surveys cover firms and banks too, but I think the household version is most interesting. In Q3, household sentiment is weak, but mixed. Price expectations are very soft. Some of the savings data support the idea that China's economy is near a structural turning point.

China has now released trade price and volume data for September. They show export volumes holding up despite tariffs, and that isn't because of price cuts. The recent mild upturn in import demand has also sustained. That calls into question the sharp fall in last week's FAI data.

Detailed monetary data for China continue to look more positive. Three trends stand out: a further slowing of the flow of household money into time deposits; a resumption of capital inflows; and continuation of the faster pace of PBC lending to the financial sector.

Detailed Q3 data include a few puzzles: net export contribution stable when the trade surplus declined; construction dropping sharply when property has looked less bad; and quarterly investment growing when monthly FAI has dropped. The one detail that really adds up: manufacturing remaining strong.

Property is weak, manufacturing FAI has slowed, consumer spending on goods is soft, and price deflation isn't lifting. However, services consumption is better, and output of both goods and services is growing by more than 5%. The government likely still thinks the economy is muddling through.

Yesterday's monetary and credit data for September weren't bullish, but I do think they were incrementally encouraging: excluding CGBs, credit issuance and the credit impulse ticked up; the firming of M1 growth has continued; and there is more evidence of a floor in the M1:M2 ratio.

For the first time since 2021, my models show a fall in the probability of easing. The backdrop is effective monetary policy: inflation is low, but there aren't signs of rising real rates. For now, my base case is rates stop falling. For rates to rise, inflation needs to show up outside of equities.

The stabilisation of PPI is fragile, with continued sharp falls in some of the sectors targeted by anti-involution, as well as continued weakness in building materials prices. In CPI, falling food prices will eventually reverse, but soft services prices shows underlying CPI inflation remains weak.

Shipments to the US remain as low as in May. But with exports to other regions continuing to rise, the uptrend in overall shipments that began in mid-2023 remains intact. At the same time, imports in the last few months have risen a bit, so the trade surplus, finally, has eased back.

Upstream prices in level terms have stabilised, but as with food prices, are still falling YoY. With aggregate spending and PMI output prices remaining weak, core inflation is unlikely to be rising. The one upside risk is an end to the multi-year trend of households shifting money to time deposits.

This discrepancy in the PMIs – S&P versions better, official PMIs still weak – is puzzling. Probably, the overall message is that China is back to a period of muddling through, with the cycle not robust, but getting some support from the better equity market and rise in the credit impulse.

China's trade data are published over the course of four releases each month. We are now onto the second, with three main takeaways: auto exports are accelerating again, import demand is up, and the trade surplus continues to broaden.