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Yesterday, officials claimed high-tech industry contributed 60% of the aggregate rise in industrial earnings through July. That's partly because profitability in heavy industry is so poor. Even then, overall profits still only rose 4%. New sectors still aren't strong enough to really lift the whole.
Often, export slowdowns mean weaker currencies. But this time, currencies are already weak, and for Japan and now China, it isn't clear the export cycle is dominant. For CNY, there are structural reasons for currency strength. Cyclically, Korea will find it easier to fight appreciation than Taiwan.
Just as inflation concerns ease elsewhere, there's an acceleration in China. Food prices have risen 7% YoY in August, the biggest rise in more than 2 years. However, while that complicates the deflation narrative, it isn't enough to change it, given a renewed fallback in PPI and weak M1.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
A chart-heavy note looking at some of the broader trends in China's foreign trade. Exports have been reasonably strong, but no more robust than they were before covid. The bigger change is in imports, which are weak, a trend that protectionism elsewhere will do nothing to resolve.
Headline measures of inflation were generally weaker in July, and JPY appreciation and energy subsidies will cause more falls in the next couple of months. To get a sense of underlying inflation, we are watching core services CPI – stable in July – services PPI, wages and the Tankan.
The BOK's slow journey to rate cuts continued today, with further shifts evident in both the statement and the governor's remarks. That makes a rate cut highly likely in Q4. But there are still risk scenarios, with the obvious one being that property doesn't slow in the way the BOK seems to expect.
In today's data releases, business sentiment remained low, export growth stable, and prices soft. Overall, the macro data is giving the BOK more room to cut. The one obvious exception is the housing market, though we are also interested to see if the BOK mentions the resilience of service inflation.
This year, the BOK has gradually put rate cuts on the agenda. That makes a near-term change in policy a risk, and the recent strengthening of the KRW gives the bank some justification. But in July, the BOK played up worries about a property rebound, and data show that has continued through August.
Rather than industrial policy, the better explanation for weak corporate finances is deficient domestic demand. Related to that, the biggest shifts since covid haven't been in export growth or PPI, but in imports and core CPI. Macro policy doesn't suggest this weakness is set to change.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
We can't see anything in today's data to shift market sentiment. Property remains in a deep slump, and retail sales are weak. But that's not new, and with some of the pressure coming off the CNY, Beijing will probably think its muddle through approach of incremental easing will continue to work.
Today's property prices were very weak again, and that is important. But in the real economy, the deflator might still turn positive this quarter, because of the recent stabilisation of PPI, and the weather- and pork-propelled rise in food prices.
GDP grew in Q2 for the first time in a year. The driver was domestic demand, and with nominal wage growth rising, and a greater probability that the high in $JPY has been seen, it is becoming more likely that this recovery in spending can now continue.
The labour market isn't as tight as the July fall in unemployment suggests. Employment didn't rise last month, with the only change being lower participation. That drop is unlikely to signal a reversal in the structural rise in the part rate, a trend that can be expected to restrain wage growth.
Currency weakness boosting inflation has been a regional theme. But currency strength wouldn't automatically mean a CB policy pivot. That's true in Japan, where other factors have been driving prices, and in China, where currency weakness hasn't yet been an obvious obstacle to policy loosening.
The PBC's Q2 survey shows consumption not especially weak, with the real post-20 changes in household behaviour being a shift from spending on goods to services, and from saving as property and riskier investments back to banks. The corporate survey wasn't bad either, but loan demand fell sharply.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
The July price data offer more evidence that the food price cycle has turned. With less PPI deflation too, it is likely that headline CPI gets a bit of a lift. But core CPI inflation in July was once again very weak, which is enough of a reason to assume that the PBC will continue to cut rates.
July exports fell, but it is premature to call the start of a downturn. That's partly because of market share gains. These are solid, though not impressive enough to validate over-capacity. In terms of structure, the much bigger shift is in imports, which have completely over-turned pre-20 trends.
It doesn't make sense to read too much into a single monthly indicator, but the MoM fall in exports in July does follow weakness in the (presumed) exporter-heavy Caixin PMI. As exports have been the one bright spot in the economy, these shifts increase the sense of growing downside risks.
In the BOJ's first comments since last week, Uchida says that policy is dependent on the economic outlook, which could be affected by market moves, particularly the JPY. However, he also reiterates confidence in the underlying changes that the BOJ has been talking about throughout this year.
The June jump in earnings was almost all about bonuses. But the details were solid: for full-timers, wage growth didn't slow much, and it accelerated for part-timers. There's also now a greater likelihood of a trend rise in real wags as the less-weak JPY dampens import prices.
The huge moves in markets may well have an impact on the extent and pace of further BOJ policy normalisation. But when markets settle down, developments in the real economy will also matter. It will be particularly important to track SME wages, service prices, and consumption.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.