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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.
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.
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.
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.
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.
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.
In October, headline PPI fell back into deflation, and CPI inflation eased quite sharply too. But there are signs that China is nearer the end of this deflation shock than the beginning.
The two big recent catalysts have been 1) that the new leadership ends China's growth story; and 2) zero covid is about to end. All told, this chatter hasn't taken the market far. For the industrial cycle, there remain tentative signs of a bottom.
YoY export growth fell to zero in October. More downside is ahead, though surging car shipments suggest autos might buck this trend. Import demand is also slowing. It should contract aggressively in the next 6M, though that looks pessimistic given commodity prices and imports in the PMI.
Early data show some deterioration in China's financial account in Q3. The shift though isn't as significant as might be expected, and the current account improved. The data won't do much to boost the CNY. But at face value, they aren't a reason for a sharper sell-off.
The PMIs remain weak, with the only bright spots being construction, and prices. The cycle may have found a floor, but only a weak one.
Some slides from a brief presentation I gave yesterday. It was in three parts: the deflation problem; the short-term outlook; and the Congress contradiction.
There are signs that the economy is bottoming, in the form of property sales, excavator sales and, to a lesser extent, property starts. These though are tentative, and need to strengthen before concluding the economy is through the worst.
With September's monetary data suggesting a further fall in liquidity preference and M1 growth, it still doesn't look like the economy is poised for a turnaround. But it is starting to feel like the risks around the cycle are less to the downside than they have been for the last few months.
While the rest of the world is in inflation, China, at least on a sequential basis, has sunk into deflation. Apart from food and property prices, there's no sign of inflation coming back.
Policymakers have blinked, announcing a raft of measures to support property. On their own, these aren't sufficient to have conviction that the economy will turn. But with improvement in the construction PMI, they do suggest that for the first time in a while, not all the cyclical risks are down.
The overall tone of today's PMIs suggests that China's cycle remains weak. However, the construction PMI rose again, and with the official headline manufacturing PMI and input prices creeping up, for the first time in a few months, there is some risk that the domestic industrial cycle is bottoming.
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.