China is also facing a period of stagflation

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by Shaun Richards

We have become used to China being a leader for world economic growth. That is true in two ways as it’s role as a developing economy on this front found itself being added to by the effects of the Covid-19 pandemic. This has been in play again recently as we note reports like this from the South China Morning Post last month.

While since cleared, the Yantian congestion that spanned from late May to mid-June  looks to affect the retail supply chain for weeks or even months, with some analysts saying Christmas shipments could be affected by massive backlogs. Located in the Pearl River Delta, the port – responsible for a tenth of China’s foreign container traffic – was forced to close due to a coronavirus outbreak among dockworkers.

There have been further outbreaks and closures since as we mull the effect not only on trade but also on prices and inflation. One area picked out is bicycles.

“Everyone’s warehouses are still pretty full now,” said Derrick Tian, who works for a bicycle-assembly factory in Shenzhen that exports bikes to the east coast of the United States. “Our warehouses can’t take in any more bikes, now.”

Trade Figures

We can switch now to Friday’s trade data.

BEIJING, Aug 7 (Reuters) – China’s export growth unexpectedly slowed in July following outbreaks of COVID-19 cases, while imports also lost momentum, pointing to a slowdown in the country’s industrial sector in the second half even as easing global lockdowns boost commerce.

So not the boost to exports hoped for whilst slower import growth suggests a weakening of the growth in domestic demand too.

Exports in July rose 19.3% from a year earlier, compared with a 32.2% gain in June. Analysts polled by Reuters had forecast a gain of 20.8%……….Imports in July rose a slower 28.1% from a year earlier, lagging a 33% increase forecast in the Reuters poll, and 36.7% growth the previous month. Demand has dropped in recent months for iron ore, a key ingredient in steelmaking.

The latter point will be troubling for Australia and reminds of this from the latest manufacturing PMI release.

.The gauge for output in July was the lowest in 16 months,
while the gauge for new orders was the lowest in 15 months. Surveyed manufacturing enterprises said market demand was weak. High product prices suppressed demand, especially for consumer goods and intermediate goods.

Returning to the trade figures there will be an explicit GDP boost as shown below.

China posted a trade surplus of $56.58 billion in July, compared with the poll’s forecast for a $51.54 billion surplus and $51.53 billion surplus in June. ( Reuters)

But the detail suggested that elsewhere things were not so strong.

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Consumption

This looks to be the weakest part of the economy but boosting it faces an issue rather like at least some of the western capitalist imperialists.

By the end of last year, China’s household debt as a percentage of disposable income had reached a record high of 130.9 per cent

Servicing loan payments is eating up disposal income that could otherwise be used to buy goods and services to support the economy

That was from the South China Morning Post over the weekend. It poses several questions and let me give you a couple of thoughts. Firstly such a situation suggests they are in a similar place to us where interest-rate rises on any scale are increasingly unlikely. Next if they wish to give consumption a push they could use the Bank of England play book of interest-rate cuts followed by a Term Funding Scheme to push cheap cash to the banks. The catch is that the People’s Bank of China is as we have noted before trying to take the heat out of the property sector.

Chinese banks doled out a record 12.76 trillion yuan in new loans in the first half of 2021, even as the People’s Bank of China (PBOC) sought to cool broad credit growth to rein in debt risks. ( Reuters)

But as ever it is complex as we see this being factored in.

Chinese banks are estimated to have issued 1.20 trillion yuan ($185.29 billion) in net new yuan loans last month, down from 2.12 trillion yuan in June, according to the median estimate in the survey of 29 economists.

But then we saw this.

Effective July 15, the PBOC cut the reserve requirement ratio (RRR) for banks, releasing around 1 trillion yuan in long-term liquidity. Analysts expect another RRR cut this year.

For those who do not follow this closely China often operates via allowing backs to lend more rather than via the price or interest-rates. So a quantity rather than quality method and we see that the restrictions collided with an easing.

Inflation

There was a clear warning of trouble on the horizon flashed this morning.

China’s producer price index (PPI), which measures costs for goods at the factory gate, went up 9 percent year on year in July, the National Bureau of Statistics (NBS) said Monday………On a monthly basis, the PPI gained 0.5 percent in July, also faster than the growth seen in June. ( China.org )

As to what was driving this we see these moves.

Among the ex-factory prices of industrial producers, the price of means of production rose by 12.0% , which affected the overall increase of the ex-factory prices of industrial producers by approximately 8.95 percentage points. Among them, the price of mining and quarrying industry increased by 38.7% , the price of raw material industry increased by 17.9% , ( China Statistics)

But in a sign of what we saw elsewhere there was also this.

Among them, the price of food rose by 1.0% , the price of clothing fell by 0.4% , the price of general daily necessities rose by 0.5% , and the price of durable consumer goods fell by 0.3% .

That was a guide to the consumer inflation measure or CPI

In July 2021 , national consumer prices rose by 1.0% year-on-year . Among them, urban prices rose by 1.2% , rural areas rose by 0.4% ; food prices fell by 3.7% , non-food prices rose by 2.1% ; consumer goods prices rose by 0.6% , and service prices rose by 1.6% – monthly average, the national consumer prices rose year on year by 0.6% .

As you can see there has been very little consumer inflation in the year so far and only a small increase on that rate in July. However there was a warning in the fact we saw the first monthly rise in 2021 and something we have looked at regularly was back in play or rather a consequence.

In food, the price of livestock and meat dropped by 25.5% , which affected the CPI by about 1.12 percentage points, of which the price of pork fell by 43.5% , which affected the CPI by about 1.05 percentage points;

Although is the disease over?

China is taking hog biosecurity to new levels – 13 stories in fact. That is the height of a building in southern China where more than 10,000 pigs are kept in a condominium-style complex, complete with restricted access, security cameras, in-house veterinary services and carefully prepared meals. ( SCMP)

So there may be more to come on this issue which is rather playing with the consumer inflation numbers.

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Comment

The depressed theme here has got some quasi official support this morning. From Yuan Talks.

#China’s #GDP growth may slow to 6.3% & 5% y/y in Q3 and Q4, on slowing exports and property investment momentum, said Zhu Baoliang, director of the economic forecast division at State Information Centre, a think tank affiliated with economic planner.

That is likely to have a bit of a sugar coating as we note that this quarter looks to be a poor one. With the sustained push in producer prices we see that China too is looking at a period of stagflation. As ever there is a counterpoint as the news has reduced oil prices today by 3% but we are seeing stagflation issues in ever more places and that is before we get to house prices rising at an annual rate of 4.7% in June.

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