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The China Diviner
We introduce a model for the PBC's reaction function. It suggests that further policy loosening remain likely, in the form of either rate or RRR cuts.
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China – no stimulus
January credit data suggest limited monetary stimulus, and no turnaround in real estate. To be bullish, you need to argue that infrastructure/capex can offset exports/real estate, or that January data are still backward-looking.
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China – mixed
Core CPI inflation accelerated in January. But it is too early to conclude that economic recovery is driving higher prices. Before covid, hospitality prices tended to tick up during the LNY holiday. And PPI, which should also be strengthening if the economy is getting better, weakened in January.
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The China Diviner
Much market discussion focuses on consumption-driven recovery. Spending will rise in 2023, but only because it was so depressed in 2022. Policy isn't yet in place to make the recovery sustainable. In any case, GDP can't grow without property also expanding. That seems likely, but isn't yet assured.
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The China Diviner
An opinion piece recently published in the SCMP.
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China – strong headline, weaker details
The PMIs improved in January, and our FCI indicates a further rise to 52 from here. That said, the details today weren't particularly strong. They can be regarded as backward-looking, but we continue to think that policy hasn't moved enough to ensure recovery continues beyond the next few months.
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China – worse than it looks
If there was a surprise with the Q4 data, it was that the official measure of GDP managed to grow. The details were weak, with only household savings rising strongly. Those savings provide a platform for a rebound in 2023, though not if households think their income growth has permanently slowed.
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China – property floor
Official December data point to property prices bottoming out. That isn't unexpected, given the ending of zero covid and other signs that property prices have picked up. Cuts in mortgage rates suggest there could be quite a big bounce in prices, but that needs household confidence to recover.
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China – not much change
After a big fall in November, the trade data were less eventful in December, in MoM terms hardly changing at all. That means YoY growth is still deteriorating, and leading indicators point to that continuing through at least Q1.
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China – end of the deflation scare
Inflation ticked up in December, and it is fairly easy to predict that China's deflationary scare is over. It is more difficult yet to say what sort of inflation comes in its place. The ending of zero covid means higher inflation, but also erodes the usefulness of the usual leading indicators.
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China – weak credit
Credit and monetary data remain soft. In itself this isn't vital for markets, which can think the ending of zero covid matters more than anything else. But monetary data, particularly the willingness of households to embrace financial risk, will affect the sustainability of any upturn.
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The China Diviner
Policy statements have generated optimism of a shift in Beijing's economic strategy. But the language being used isn't so unusual, while the challenges the economy faces are. We still think changes in substance, as well as style, are needed, in particular material support for the household sector.
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China – unsound footing
The PMIs fell again in December, signalling that GDP probably contracted YoY in Q4. That is backward looking, and there will be recovery as China exits covid. But the weakness in consumer income confidence shown in the PBC's Q4 survey shows full recovery out of the covid trough isn't yet likely.
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China – another bad month
For the third time in as many years, China's GDP likely contracted in November. With zero covid ending and property policy reversing, there will be recovery through 1H23. But for a sustained pick-up, more policy help is needed for households.
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China – taking stock
Zero covid has come to a sudden end. That, and property loosening, will ensure economic recovery in 2023. But for next year to prove a real turning point - and justify a steepening of the curve - the government needs to announce tangible policies that boost household incomes and spending.
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China – not much money
Money and credit in November was soft. That probably reflects zero covid. With that now being reversed, credit should bounce - and with interest rates low, that bounce could potentially be big. That though is a risk case, offset by the depressed level of liquidity preference.
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China – backward looking
Inflation was soft in November, but with the exit from covid dramatically changing the short-term outlook for the economy, these price data are backward looking. Just how much core CPI can now rise will be indicated by inflation expectations and liquidity preference.
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China – ouch
Exports took a big step down in November. The out turn was probably worsened by China's covid problems last month, but tech exports have now fallen for four consecutive months, and leading indicators for China's exports point to more worsening to come.
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China – weaker again
The PMIs suggest renewed weakening of the economy in November. That perhaps explains the accelerated pace of property easing. That loosening is an important development, but as long as China remains mired in covid difficulties, the outlook for the economy will remain very difficult.
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China – third time...unlucky?
The population is starting to chafe against lockdowns, but isn't prepared for opening. The compromise path forward is rising covid cases signalling more eventual openness, but lockdowns continuing to be used to try to slow the spread of the virus. That's a very messy path for financial markets.
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China - no liquidity flood
Data released this week show the central bank's balance sheet continues to hardly grow, and depositors continue to move money into time deposits. That is happening even though real economy interest rates are at or near record lows.
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China – property prices falling
Property prices continue to fall, even though mortgage rates are likely at record lows. All the policy loosening of recent days should start to make a difference, but it is as yet difficult to imagine a big upswing in the property market.
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China – a soft floor
October data confirm the message of the PMIs that the cycle remains weak. There continue to some tentative signs of a floor, which has a bigger chance of holding given the policy moves of the last few days. But the softness of property sales suggest the foundations for any recovery remain weak.
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China – Beijing blinks again
The authorities have relaxed covid and property restrictions. It feels very unlikely that the economic disruption caused by efforts to contain the pandemic is yet over. But taken together, the policy shifts do further rebalance what previously were overwhelmingly downwards risks for the economy.
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China - credit better than the headlines
The monetary data aren't bullish, but are more constructive than the headlines suggest. That's because credit growth outside of government borrowing is rising. This keeps alive the possibility that China is through the worst, though such an interpretation is a stretch as long as M1 growth is weak.