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The official PMIs for June show China's cycle remains weak, weighed down by construction. There is unlikely to be a recovery until the property cycle stabilises.
PPI, as expected, was stronger in May. But any positive impact on market sentiment will be dampened by renewed weakness in core CPI.
A refreshed slide pack looking at China today and the experience of Asia in the 1990s, with a focus on deflation and rates, exports and mfg, and household income and consumption.
The big export growth markets of recent years – autos, BRICs, ASEAN – have lost some oomph. But cyclically, the modest recovery in exports is continuing, particularly in CNY terms.
Without effective property policy, there is still a mildly positive macro story, based on a rebound in PPI, and stronger exports. The PMI offers support for the first, but not the second.
So far, the much-discussed rise in China's competitiveness has been most obvious in import substitution. With the export cycle now recovering, it is likely this year to also be seen in a renewed increase in China's global market share.
Friday's funding for buying inventories looks small. But with falling price expectations leading to a buyers' strike, it is a step in the right direction. This buyers' strike has cut construction. By keeping savings in the banks, it has lifted the S-I and CA surplus, and lowered velocity and CPI.
Property remains in a deep funk, and while the government talks confidently about a successful transition to new growth engines, all the policy action indicates increasing concern that real estate remains so weak.
A chart pack laying out our views on China. We argue that deflation is more cyclical than structural; consumption and services have recovered; and that property inventory policy would mean real upside risk.
The fall in credit in April, while unprecedented, can be argued away as reflecting a temporary shortfall in official bond issuance. It is more difficult to dismiss the equally unprecedented drop in M1 in the same way.
CPI deflation is stabilising, though because of food prices rather than domestic demand. The surprise in April was the lack of any lessening of PPI deflation, despite some improvement in leading indicators.
The big change in household behaviour isn't from spending into saving – in both respects, pre-covid trends have been regained. Rather, the shift is savings into bank deposits and out of financial and property investments. That matters for inflation, and for policy.
The PBC's Q1 depositor surveys show that it is less consumption sentiment per se that is weak than consumer price and property expectations. In this context, the news that the Politburo is studying ways to reduce property inventories is potentially significant for the macrocycle this year.
The mfg PMIs continue to suggest the industrial cycle, in terms of activity and pricing, is through the worst. For now, though, the strength is mainly in exports. As a growth driver, that shouldn't be dismissed, but the upturn would feel more sustainable if domestic indicators were improving more.
Cyclically, China's exports are improving, but the lift doesn't look particularly strong yet. Structurally, too, recent export performance has been a little underwhelming.
The belated release of the PBC's consumer survey continues to show falling price expectations, and so hint at rising real rates.
The consensus on China has improved in recent weeks, but there's nothing in the Q1 activity release to reinforce that shift.
China's monthly monetary release doesn't seem nearly as important as it once did, because a lot of the major indicators are rangebound. The one indicator that looked a bit different last month was M1, but that rebound fully reversed in March back down to just 1.1% YoY.
We think today's export data were strong, reaching an all-time high in CNY terms. If there was weakness, it was in imports. The result, obviously, is a renewed widening of the trade surplus.
Price trends in China remain range bound, with PPI falling at a 2.5%-3% YoY rate, and CPI fluctuating around 0.7%. Narrow leading indicators for inflation suggest some strengthening from here, but a real change in inflation dynamics needs a change in China's overall macro dynamics.
Our view has been that China's cycle has bottomed, and that market sentiment has been too pessimistic. The official PMIs for March support that idea, but the details aren't convincing enough to think the cycle has real momentum.
China's rising competitiveness in more capital-intensive manufacturing sectors is an important theme that we still buy into. However, relative to this belief, and the current global concern about China's EV export peril, recent export performance has been a little underwhelming.
We aren't convinced that falling PPI shows China is stuck in a deflationary trap. China's PPI cycle isn't out of whack with global trends, and unlike Japan in the 1990s, monetary policy isn't reinforcing the drop. There's potential for nominal growth to look better this year.
Jan-Feb data validate the idea that the cycle has bottomed. The driver, however, is industry, which doesn't feel consistent with the continued weakness in property. Another leg-up in macro confidence likely still needs a real bottoming of real estate, and a strengthening of consumption.
Our impression from the data released so far for January and February is the underlying economy is going sideways. The credit impulse is soft, but not especially weak; mortgage growth has slumped, but isn't worsening; and both M1 and excavator sales look a bit stronger so far this year.