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January fx settlement data suggest large fx intervention for a second consecutive month. One reason is the CA surplus, which other data today show widened in Q4. Another is interest rates which are more stable, even though monetary trends aren't changing much, and property prices continue to fall.
CPI inflation softened in January, but it always does when the new year holiday falls in February. PPI has less seasonal distortion, and rose MoM in January for the second consecutive time. The GDP deflator is likely to improve again in Q1. This is about external factors, but deflation is lessening.
Today's official PMIs were below 50. That shows the domestic economy is weak – though the data were likely pulled down by the coming holiday. More interesting was the further rise in prices in manufacturing. That change relates to USD/global prices, but does suggest an upturn in nominal momentum.
Like the actual monthly deposit data, Friday's PBC Q425 depositor survey shows a slowing of the flood of household savings into the safety of bank deposits. The structural deflation pressure caused by the collapse of real estate activity and the chaos of the covid lockdowns is beginning to ease.
Most important for markets is today's Q4 data is the pick-up in the deflator and nominal GDP, which external trends suggest can run further. In terms of the details, the data show two big discrepancies: collapsing FAI v industrial stability, and falling retail sales v rising consumption share of GDP
Some of the signs of domestic stabilisation I'd been tracking in 2025 faded into year-end. However, they didn't disappear entirely. China is also starting to benefit from the global tailwinds of weaker USD and rising commodity prices, creating upside risks for China's nominal cycle.
China's release today of December data for money, credit and fx settlement tell three stories: domestic savings outflows have lost momentum, credit ex-government is looking a bit stronger, and capital inflows are really picking up. If right, the last dynamic is the most important for markets.
The second-derivative improvement in inflation is continuing, and should be seen in a better deflator when the Q4 GDP data are released later this month. However, there's not yet enough to think the trend can persist beyond Q126. One factor that could derail the improvement would be a stronger CNY.
My latest video, discussing the lessening of deflationary pressure, whether that can continue, and what the implications are for markets.
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.