East Asia Econ

The currency is on the move again. Interest rate differentials suggest fair value for $CNY of 7.3; the weakness of the domestic economy and the over-shooting that normally happens with $CNY moves suggests more upside still. This move increases risks for China's economy, and for global markets.

YoY upstream price inflation is fading. Sequentially, however, there's some stabilisation. That's consistent with policy, but isn't yet likely to be reflecting a fundamental turn. Activity usually improves after the summer, and leading indicators like liquidity preference continue to fall.

The headline data were a bit stronger in August, but the details remain weak. It doesn't feel that the government is yet doing enough to really turn the economy around.

Overseas, the idea of Peak China is gaining traction, which is quite at odds with the full-on confidence in the further rise of China expressed by leaders in Beijing. The contradiction does suggest a need for policy change, but at least for now, that shift seems like the risk rather than base case.

Monetary data in August remained weak, with little reason to suggest any upturn in the macro cycle.

Food prices pose something of an upside risk, but underlying price trends, particularly in PPI, continue to look more deflationary than inflationary.

Exports are now starting to slide. That's important given they've been the one bright spot for the economy in the last few months. Weakening external demand will mean China's cycle is even more challenged into 2023.

Probably the two most important inter-related questions today are: whether the economic slowdown turns to financial crisis; and whether the Party Congress leads to a turn in policy. The former seems a bigger risk than the latter, with the CNY likely most vulnerable.

The August official PMIs suggest no change in the economy. Growth remains weak, and doesn't look likely to turn up any time soon. Price indicators continue to suggest deflation is a bigger risk in China than inflation.

Today's rate cuts were focused on mortgages. That follows Q2, when home loan rates fell at the sharpest pace on record, and yet property remains weak. There likely needs to be more direct help for developers and consumers, and a more united policy showing from Beijing, to get the cycle going.

PPI inflation and saver liquidity preference are two indicators worth monitoring as leading indicators for China's cycle. Data releases in the last few days don't suggest either are turning up, though corporate liquidity preference last month at least didn't worsen further.

The cycle is weak, and yet the market was surprised the PBC cut rates yesterday. Central bank rhetoric had been suggesting rates had bottomed. But low inflation and signs of rising real rates make it more likely that rates fall rather than rise.

The cycle remains weak, with the growing risk of a further step-down in the reminder of the year as exports slow. Following today's interest rate cut, further monetary easing remains likely.

Headline credit growth weakened in July, and even though M1 growth strengthened, the data don't suggest "stimulus" that can turn around the current trajectory of the economy.

Today's July PPI and CPI data in China suggest again that deflation is a bigger risk than inflation.

China's cycle remains weak. Perhaps money data and excavator sales for July will reinforce the message of the construction PMI that stimulus is feeding through. Otherwise, the risk remains of a growth accident that, via a weaker CNY, gets transmitted to the rest of the world.

Exports remain resilient, but the leading indicators continue to point down, with imports of components slowing again in July. It is likely exports are contracting before the end of the year.

Chinese exports have boomed since 2019. That boom isn't (yet) turning to bust, but it is likely ending. That's a big issue when the rest of the economy is so weak. Even without a new covid outbreak, there's a rising risk of a real growth accident in 2H22.

The latest fall in Covid-19 cases could lift activity in August. But with property still very weak, inflation momentum softening and exports slowing, it feels that any upturn in growth would be short-lived.

The headline PMI was weak in July, and the details were soft too. There's no sign of the cycle finding a durable floor.

China's export market share gains show local firms remaining competitive, and that should make some individual equities interesting. But macro trends don't look strong enough to lift rates. Indeed, price indicators look more deflationary than inflationary.

As remarkable as the weakness in property the last year has been the strength of exports. The downturn in property will be more obvious if that strength in exports isn't sustained.

Beijing is relying on infrastructure for growth. But with property in recession, exports slowing, and consumption dampened by Covid, the growth hole that needs to be filled feels too large. Without policies that support these other sectors, the current cyclical recovery seems unlikely to persist.

June data improved, and in July the economic indicators will likely be stronger again. But it doesn't feel like the conditions are yet in place for a sustained recovery in economic momentum through 2H. Indeed, it feels like there is a rising risk that the recovery runs out of steam.

China's exports continue to show some resilience, but there's nothing to suggest a repeat of the 2020-01 boom that helped lifted the domestic economy out of the first covid shock.