East Asia Econ

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.

My latest video discussing the inflation outlook. Apart from the anti-involution drive, the stabilisation of demand deposits and property do ease the downwards pressure on prices. But the weakness of aggregate demand remains, and as yesterday's PMI suggested, the outlook for prices remains subdued.

While the PMIs don't point to any real improvement, in nominal terms there's been a lift, with input prices above 50 again. That's in line with the credit impulse. But the credit impulse might already have turned, and while PPI deflation has lessened, output prices don't suggest stronger CPI.

This is a dashboard I've been working on, where you can map China's auto exports by country and type of vehicle over time. It now includes volume and prices at a national level. I'll be adding more series over the next few weeks. I also have a favour to ask.

Property prices and sales, investment and retail sales all deteriorated in July. It is at least possible to argue that the worst of the drop in property activity is now completed. That creates room for second-derivative improvement, but even that could be offset by slowing manufacturing capex.

I missed this release earlier today. The rise in the credit impulse stalled in July, dampened by slower government, non-state and mortgage borrowing. However, the monetary data remain a bit more constructive: while the recovery in M1 growth slowed, the bottoming relative to M2 remains intact.

Today's official data show core CPI has rebounded to almost +1%. That would be an important change, but at best it looks narrow, with almost all the rise coming from "miscellaneous goods and services". The leads from PPI and the PMI remain soft. Separately, yesterday's CA data for Q2 were stable.

Overall exports still don't show a tariff hit, with shipments to ROW offsetting the weakness of direct sales to the US. Imports are more interesting, with signs emerging of an upturn. That so far is (very) mild, but has been enough to cap the trade surplus, albeit at the high level of USD100bn.

Deflation looks like 1990s Japan. But China's exchange rate doesn't. Real CNY depreciation helps exports substitute for the weakness of domestic demand in a way that didn't happen in Japan. It also postpones the sort of stimulus that would ease deflation and provide more direction for markets.

Two things. First, my latest video, discussing what's not surprising about the trade surplus (the rise in capital goods), and what is (that for exports China's global market share gains have accelerated, while for imports, they've fallen). Second, an interactive dashboard on China's auto exports.

The weakness was true even for pricing, which is the focus of the most recent policy push: input prices did improve MoM, but not to over 50, and output prices fell further. That Beijing has turned its attention to oversupply should help equities, but I am doubtful that alone produces macro recovery.

Does anti-involution produce macro turnaround when the September combination of stock market and local government bail-out failed? The markets are hopeful. I am more cautious, given China's macro problems are weak demand as well as strong supply. I'd be wrong if household savings behaviour shifts.

The government is increasingly focused on the supply-side issue of corporate involution as the driver of unwanted deflation and weak corporate earnings. However, the decline in profits has been led by heavy industry, showing the importance of the weakness of property and aggregate demand.

Markets have perked up on hopes that officials will tackle over-supply. But belated publication yesterday at 8pm (!) of the PBC's quarterly opinion surveys is a reminder that business involution isn't the only challenge. Household price, income and employment expectations all continue to fall.

Based on official data, tariffs have as yet to cause any real reversal in the surge of export volumes that's now been underway for two years. That's even though export prices have, for the first time since 2003, started to rise YoY. It isn't obvious that China is absorbing the cost of the tariffs.

Today's release of more details of Q2 GDP are interesting, if puzzling. GDP was held up by a larger contribution from investment, even though construction contracted for the first time since early 2022. The weakness of construction does, however, further the economy's steady shift towards services.

Two things stand out in today's big macro release. First, more signs of property bottoming. But there's no indication of a pick-up, which matters given the second takeaway: the weakness of nominal GDP. On my numbers, that grew just 2.4% QoQ annualised, with the fall in the deflator accelerating.

Property price deflation intensified in June, albeit only mildly. Leading indicators suggest there shouldn't be a new step-down, but only interest rates point to real upside – and interest rates stopped being a reliable lead for the property market some time ago.