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It wasn't surprising that core CPI picked up in February. But the rise took average core in the last three months to 2% annualised, a rise big enough to challenge the idea that there's been a structural shift down in core since covid. That reinforces our view that underlying inflation has bottomed.
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.
The mfg PMIs continue to tell different stories, with the official survey below 50, and the Markit version above. The gap probably reflects seasonality and the strength of exports versus property. However, there has been policy easing too, so remain mildly optimistic about a floor for the cycle.
We can't find much evidence of Chinese export price deflation. That's because: price deflation is common across economies when exports weaken; aggregate data don't do well in capturing lower prices in individual products; and China's exporters, being private firms, aren't likely to be so irrational.
The PBC's monetary policy report included a box arguing that monetary conditions shouldn't be assessed solely via the quantity of credit, and that the big falls in interest rates matter too. That would be an easily-accepted argument in another economy, but in China remains a hard sell.
Credit data are at a level that is awkward for officials, and investors: too strong to be consistent with deleveraging, but not strong enough to think the cycle is about to get a good lift. The one positive surprise in January was a lift in M1, though that might be related to the stockmarket rescue.
CPI and PPI continued to fall YoY in January, while core CPI rose. CPI will be firmer in February due to the holiday, and there are also some indications that PPI won't weaken further. However, there aren't any signs of a real pick-up in either, so investor worries about deflation will persist.
Korea's trade surplus with China has collapsed, taking with it Korea's overall surplus. This offers a clear illustration of China's competitiveness, and argues for CNY strength, not weakness. But it also indicates that the relative fundamentals for the KRW are also deteriorating.
At a headline level, both the manufacturing and non-manufacturing PMIs crept up in January. The details in the manufacturing survey were weaker than the headline. Activity remains soft, but overall, looks to be going sideways.
Equity market sentiment suggests weak domestic demand should be getting weaker still. And yet, import demand has been firm, and is picking up. The two big drivers are resilient commodity demand and rising imports in the semi space. But imports of other capital goods show signs of rising too.
There remain multiple reasons to worry about China's economy. But it is also possible to argue that the outlook now isn't as bad as current expectations. There are five areas to highlight, with the main substantive change being the notable expansion of the PBC's balance sheet.
Consumer confidence has collapsed, but corporate sentiment hasn't. Indeed, given the macro weakness, business confidence feels somewhat resilient. That isn't sufficient on its own to lift the macro gloom. But it will be important if and when the consumer and property sectors bottom out.
A slide pack from a presentation on the lessons China can learn from the development experiences of other economies in the region
Official Q4 data reiterate existing trends: weak consumption and property, but some growth in other sectors. The property data were disappointing, when other data have started to suggest a floor. But we still think there are some upside risks, with the PBC's balance sheet expanding more quickly.
Government borrowing – and weak GDP growth – continues to generate a modest lift in the credit impulse. Non-official borrowing did tick-up in December, but only marginally. Mortgage lending and M1 remain weak. At best, the data suggest a muddling through on the back of government projects.
China's data continues to be neither good, nor particularly bad. Headline PPI and CPI are both in deflation, but there aren't signs of core CPI falling. Exports are going sideways, and imports have strengthened. The rose in imports has eroded the trade surplus.
One consequence of China's industrial strength will be protectionism. But we think there should be an exchange rate impact too. The real CNY has fallen by 6% since 2020, while the manufacturing trade surplus has risen to over 10% of GDP, and real interest rates might have risen.
The headline PMIs suggest activity is going sideways, but the details are a bit better, and both feel stronger than investor sentiment. Policy is also becoming more supportive, with more confirmation today of expansion of the PBC's balance sheet. The combination should mean some upside for markets.
M1 and NGDP remain weak, and consumption is softer than headline data suggest. These are headwinds, and we don't expect macro turnaround. But we are somewhat more concerned about an upside surprise than further deterioration, with one driver being PBC balance sheet expansion.
The credit data don't change the cyclical picture of weak growth, held up by government spending. But while not strong enough to boost activity, credit is rising relative to GDP, now reaching 300%. M1 continues to fall, which is deflationary, pushing down NGDP, and raising the credit ratio.
There continues to be no inflation in China. At a headline level, that will change when food prices rebound. But the decline in inflation isn't just seen in headline. The run-rate of core has slowed from 1.8% annualised before covid to 0.6% since.
As a general trend, both exports and imports remain range-bound. That's interesting, because exports haven't fallen so far from the peak, and imports look much stronger than the collapse in property. Exports have probably bottomed, but there's likely downside risk for imports.
We think the main themes for China remain weak aggregate demand and pricing, and strong external surpluses. That indicates lower rates and a stronger CNY. To think that is too pessimistic, we look for signs of better property activity and a reversal of the flow of savings into time deposits.
The PMIs weakened again in November, with both manufacturing and services now below 50. Price measures were also weak. Recent fiscal support should remove some of the immediate downside risk, but there's nothing yet to suggest a real rebound in the cycle, equities, or rates.
Property price deflation worsened in October. The failure of real estate to find a floor means the macroeconomy will likely remain weak into 2024. With overall inflation also soft, we still expect policy rate cuts.