China has coal and house price inflation plus pork disinflation in a toxic mix

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by Shaun Richards

Today the news is centered on China and we can start with a signal of inflation rattling through the system.

2021 August, the country’s industrial producer prices rose 9.5% , up 0.7% ( China Statistics)

So we have a continuation on two counts. The first is that this series has been on the rise since January with monthly rises varying between 0.3% and 1.6%. The second count is that we have been seeing strong levels of producer price inflation ripple across the world.

The drivers of the move are shown below.

Among the ex-factory prices of industrial producers, the prices of means of production rose by 12.7% , which affected the overall increase in the ex-factory prices of industrial producers by approximately 9.44 percentage points. Among them, the price of mining and quarrying industry increased by 41.8% , the price of raw material industry increased by 18.3% , and the price of processing industry increased by 8.0% .

Some of this is the price of coal and as Glenn Frey would say the heat is on. From InQueensland earlier.

“Both the Newcastle Index and API4 (South Africa’s coal index) are nearing all-time highs and are at levels which have not been seen since mid-2008, being twelve years ago. “

A situation which China has made worse by its own actions.

Metallurgical coal was selling at $US300 a tonne this week and overseas companies selling to China were earning a staggering $US480 a tonne, a price boosted because China has banned imports of Australian coal.

Thermal coal, which Bravus will be producing at Carmichael, has doubled in price in a year and the higher quality Newcastle coals are near $US100 a tonne, but much higher for producers overseas.

So bad for inflation in China but party time for producers in Australia and the UK found itself adding to the game yesterday.

The UK fired up an old coal power plant on Monday to meet its electricity needs.

Warm, still, autumn weather has meant wind farms have not generated as much power as normal, while soaring prices have made it too costly to rely on gas. ( BBC)

Actually weak wind power is what has been normal for the UK this year.

Consumer Inflation

We open with what look likes a very different world.

In August 2021 , the national consumer price rose by 0.8% year-on-year . Among them, urban prices rose by 1.0% , rural areas rose by 0.3% ; food prices fell by 4.1% , non-food prices rose by 1.9% 

The clue that something else is in play is in the food price move which brings us back to the pork issue that we have looked at regularly.

In food, the price of livestock and meat fell by 27.1% , which affected the CPI by about 1.20 percentage points, of which the price of pork fell by 44.9% , which affected the CPI by about 1.09 percentage points;

So if we take the pork price move out we see that inflation would be around 2%. Although if we look at the monthly move we see that it is a change on last year rather than a move happening now.

 of which the price of pork drops by 1.4% , which affects the CPI drop by about 0.02 %;

Even allowing for this factor we see that consumer inflation is rather low considering the surge in producer prices we have seen in 2021.

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Stock Market Troubles

There have been ongoing issues with tech shares in China and this morning that was in play in Hong Kong.

Another brutal day in Hang Seng -2%, Hang Seng Tech -4% after Chinese authorities told gaming authorities to curb “tendencies to focus on traffic and money”

Bilibili -6%

Tencent -6%

Meituan -5% ( @CBNCJou )

In mid February the Hang Seng was just under 31,200 whereas it closed today at 25,716 which is very against the theme for stock markets. For example earlier this week the Nikkei 225 in Japan went above 30.000. Perhaps some of the selling is related to this in the Financial Times from someone who was previously reported as a buyer into the falls.

Cathie Wood, the chief executive of Ark Invest and one of the world’s most closely watched investors, said her fund had significantly reduced its exposure to China, leaving only a portfolio of companies that were identifiably “currying favour” with Beijing. Ark’s sharp strategy shift, she told an audience of institutional fund managers on Thursday, was because the environment in China was “quite different” from the one that many global asset managers had poured funds into late last year.

Of course this probably pales into insignificance when compared to the enormous Tesla position.

But this does link in with the way that China has been behaving recently.

The education directives banned for-profit companies from teaching school subjects, effectively wiping out the country’s multibillion-dollar listed tutoring sector overnight. The measures are part of a wider crackdown on the tech, entertainment and gaming sectors. ( FT )

According to the South China Morning Post this is ongoing.

Beijing said to freeze new video game approvals in China

As ever whilst some have singed fingers those in an extremely unfashionable area are able to light a cigar.

Chinese #coal miners are rallying, with a gauge tracking the sector surging over 7% and several leading miners jumping by daily limit of 10%. The most-traded thermal coal futures in Zhengzhou jumped above 1,000 yuan/tonne for first time ever. ( @YuanTalks )

Evergrande

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I think this summarises the state of play quite well.

If you know anyone who’s in the market for some yield, there’s an Evergrande 2-year USD bond yielding 113%. ( @DavidInglesTV )

So about 113% over the US bond benchmark! This next bit sounds ominous.

*CHINA ALLOWS EVERGRANDE TO RESET DEBT TERMS TO EASE CASH CRUNCH ( @DeltaOne)

There seems to have been a link between this real estate developer and Tether and it has created a complex mess.

How strange it is that the same day bitcoin tanks and exchanges all coordinate a shutdown that this happened to Evergrande. Tether refuses to deny holding Chinese commercial paper. ( @Bitfinex’ed )

As we stand Tether as I understand it is taking a tip from the ECB and marking its holdings at what it paid for them.

So we have quite a mix which Britney would describe thus.

I’m addicted to you
Don’t you know that you’re toxic?
And I love what you do
Don’t you know that you’re toxic?

Comment

It is no great surprise that we see signs of stress appear in the property market in China. There has been a surge in debt of which the estimated US $300 billion of Evergrande is the largest but far from alone. Then we see the sort of financial engineering which is another warning sign and it is rather bizarre to see Tether in play here. So there are risks for some banks whose lending will not be as explicit as a bond price but will be facing a similar situation. This does explain why the People’s Bank of China or PBOC has been trying to slow down the property market but it looks to be Johnny Mathis all over again.

Too much, too little
Too late to try again with you
We’re in the middle of ending
Something that we knew
It’s over
Oh, it was over

Moving to inflation we see both deflation and inflation at once in the coal price. China is an importer causing the deflationary impact and the higher prices speak for themselves. In a way we come back to property where they have made the same mistakes as us western capitalist imperialists.

Average home prices in Dongguan surged nearly 30 per cent last year, the most among major mainland Chinese cities, according to a research unit of the Chinese Academy of Social Sciences. ( SCMP )

Overall it has slowed to an annual rate of 4.6% but look at the price elsewhere.

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