Will “bad news” be “good news” for China’s markets? Or does this confirm what ‘censored’ economist Zhang Songzhou warned – that China’s real (as in not made-up) economic growth is dramatically lower than the official data?
To the consternation of Chinese censors, a presentation delivered by an economics professor at Renmin University in Beijing sparked a controversy last month when the professor claimed that a secret government research group had estimated China’s growth in gross domestic product could be as low as 1.67% in 2018, far below the official rate.
Unpossible, right?
Well given tonight’s almost unprecedented drop (and miss) in China’s inflation prints, maybe not.
China’s factory inflation slowed sharply in December, continuing the slowdown for a sixth straight month to the weakest level since late 2016 on softening demand and lower commodity prices.
China Producer Princes rose just 0.9% YoY – plunging from +2.7% YoY in November (and almost half the expected +1.6% YoY). This is the biggest MoM drop in PPI YoY since 2010…
As Bloomberg reports, the sharply decelerating pace brings back fears of a return of the deflation which ravaged corporate profits in 2012-2016. A return of slow or falling factory prices in China would squeeze corporate profitability and put pressure on global inflation, as export prices usually follow those at factory gate.
“Deflationary pressures are on the rise in China, driven by weakening domestic and export demand,” China International Capital Corp. economists Eva Yi and Liang Hong wrote in a note ahead of the data.
“Inflation tends to fall following an extended period of softening demand growth, which was in turn led by slower expansion of the broadly-defined credit cycle.”
Of course, in the new normal, this may be seen as ‘good’ news as it opens the door for PBOC to unleash some more serious monetary malarkey – because as we showed recently, stimulus efforts over the last six months have utterly failed…
Since June 2018, China has been loosening monetary and fiscal policies in an attempt to refloat the sinking red ponzi amid the shadow banking system’s deflation.
As the following chart from Goldman Sachs shows, it is not working as the Current Activity Indicator continues to slump…
It seems no matter what China throws at it, the economy (or the market) won’t behave as the text-books say it should.
“[Beijing] will soon have no choice but to launch massive stimulus,” says Alicia García Herrero, chief Asia Pacific economist at Natixis in Hong Kong. “They do not want to give away their credibility because they said they wouldn’t do it, but there is no time to be cautious any more. Not having growth is ultimately the worst outcome of all.”
He’s right, although as we discussed last night, a further complication for Beijing arises from the fact that China’s economy is in the middle of a “tectonic transition” as its formerly massive current account surplus is about to turn negative…
… which in turn is creating serious disruptions in capital flows that could portend weakness beyond China’s borders, assuming the trade war continues to impede the foreign investments that China’s increasingly consumption-based economy needs to expand.
However, for now, the reaction is to buy Yuan not dump it…
But finally, we return to Ambrose Evans Pritchard’s recent ominous conclusion as China faces serious economic consequences (from a credit crackdown on the shadow banking system as well as trade turmoil), as he warned that the biggest tail risk is a Sino-American showdown ending in global economic slump, bitter recrimination, and a cycle of escalation “into the kinetic space”. Eurasia says relations have already deteriorated beyond the point of no return. Nor is there any workable common ground for compromise. At stake is 21st Century technology dominance, not trade.
“Rising nationalist sentiment makes it unlikely that Beijing will ignore US provocations,” it added.
The balance of probabilities is that the world will muddle through 2019 without any of these landmines detonating. Yet the drift of events is clear. The Western liberal order we took for granted at the end of the Cold War is under existential threat.
“We’re setting ourselves up for trouble down the road. Big trouble,” it said.
And tonight’s China data pushes Xi further into a corner.
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