46 Months Of Accelerating Deflation Mean Beijing Is Now Trapped

Tyler Durden's picture

It may be Saturday, but there is no rest for the onslaught of negative data from China, which overnight reported the latest, December, consumer and producer price inflation numbers, with the former printing at 1.6% Y/Y, matching consensus estimates, and a tiny increase from the 1.5% in November: the modest pick up was due to one-time items, primarily vegetable prices. For all of 2015, CPI rose 1.4%, down from 2.0% in 2014, and the slowest annual increase since 2009 and well below Beijing's goal of keeping last year's inflation below 3%.

It was wholesale inflation which again was the more troubling of the two prints, with PPI declining at 5.9% for the 5th consecutive month, below the -5.8% consensus, and printing negative for almost 4 years, or 46 months, in a row, highlighting the deeply entrenched pressures facing China's manufacturers as the economy cools. The biggest contributors to the PPI drop were extraction and raw materials, which plunged by 19.7% and 10.3% over the past year, respectively. For all of 2015, the PPI fell 5.2% compared with a decline of 1.9% in 2014. 

The modest CPI rebound was due to food prices, which rose 2.7% in December, up slightly from November, while nonfood items rose 1.1%, matching November's increase. Vegetables seem to be a bit more expensive recently, the WSJ cited a 45-year old Beijing homemaker wearing a cream-colored down jacket who gave her surname as Li, adding that she hasn't noticed much change in the price of meat or fruit.

Ms. Li said her family isn't planning on buying any new appliances but might purchase a car if it can win a license plate, which are allocated in Beijing by lottery to reduce congestion and pollution. "Most of the time, if I need something, I'll just buy it," she said.

Goldman's quick take on the Chinese data:

CPI inflation was in line with market and our expectations. Higher food prices (especially the price of fresh vegetables and fruits) contributed to the increase in overall CPI. Non-food inflation decelerated from November on a sequential basis. Core CPI (excluding food and energy) was up 1.5% yoy (vs. November: 1.5% yoy), which implies sequential inflation of 1.5% mom ann (vs. 1.2% mom ann in November).


PPI inflation came in at -5.9% yoy in December, below market and our expectations. On a sequential basis, producer prices fell 5.8% on month-over-month annualized seasonally adjusted basis, compared with -5.7% in November.


While December CPI inflation edged up from November, it was mainly driven by food price increase during winter and will likely fall in the next several months. PPI inflation was below expectations. We continue to expect further easing on the monetary policy front (our baseline expectation is 75 bps cut in RRR to largely offset liquidity drain from FX outflows each quarter of this year, and two 25 bps benchmark interest rate cuts this year). We believe policy makers are also likely to rely on fiscal and quasi-fiscal (via policy banks) policies to support growth.

Other analysts agree and are confident that another wholesale burst of stimulus is imminent, most likely in the form of an RRR cut:

"The inflation profile remains soft," said Commerzbank AG economist Zhou Hao. "China will maintain a relaxed monetary policy to reduce the local borrowing cost for corporates." Mr. Zhou added that yuan exchange rates are expected to weaken further as China attempts to reduce its external debt. China's consumer inflation remains soft while deeper than expected factory deflation last month suggests that Chinese companies need to reduce their debt as overcapacity continues to fuel losses in many industries, said Commerzbank AG economist Zhou Hao.

Just like in the west, Beijing is hoping that China's depreciating currency could add to inflationary pressure by pushing up the cost of imported goods in yuan terms, said Oliver Barron, China research director with investment bank North Square Blue Oak. He added that Beijing will likely have to ease monetary policy to cushion the impact of industrial restructuring and rising debt levels.

"So a potential benefit if inflation is below target is the reform aspect," Mr. Barron said. "It's easier when inflation is low."
China's producer-price index declined 5.9% in December from a year earlier, unchanged from the decline in November. It was the PPI's 46th consecutive monthly decline as Chinese manufacturers continue to battle fierce price pressure and fight overcapacity.


Less downward pressure on prices at the factory gate in the coming months would signal that the government is serious about reducing excess capacity, although progress is likely to be incremental, Mr. Barron said. "There's still huge overcapacity in the industrial sector that's not being addressed," he said. "I think the government's push to address overcapacity this year will go slowly."

Which brings us to Keynesian problem #1: while lower prices help an economy if consumers and companies use the savings to buy and invest, protracted price declines may encourage them to delay spending in the belief that waiting will result in still lower costs in the near future, dragging down already slowing growth. While this is great news for consumers, it is terrible for levered corporations who provide goods and services. And in a country in which total debt is 3.5x more than GDP deflation, any accelerating deflation means a debt crisis, with trillions in bad debt finally floating to the surface, is inevitable.

Finally, even if China does engage in more stimulus, which it will perhaps as soon as this week when it cuts either RRR or its interest rate (or both) again, there are two major problems:

  1. With its economy rapidly slowing down and millions of (very angry) people in the process of being laid off, leading to record strikes and a groundswell of social unrest, the last thing the government can afford to do now is to force companies to cut costs even more when, as a result of a plunging currency, soaring import prices (see Japan) will slam profit margins and lead to even more layoffs.
  2. As China depreciates even more (recall that a month ago we predicted at least another 15% in CNY devaluation, something Bloomberg agrees with today), it will face even more capital outflows: at least $670 billion according to BBG, which in turn will drastically cut the country's pile of FX reserves (and put pressure on US Treasurys). That would come at the worst possible time: just as China's banks are forced to begin recognizing the huge pile of non-performing loans as a result of a tsunami of pent up corporate defaults mostly in the commodity sector, which as we reported back in October, is as much as $3 trillion, and which as we followed up yesterday, is the basis for Kyle Bass's top trade of the year, shorting the Yuan.

Of course, the longer China does nothing, the greater its problems will become as the status quo is the status quo is also fundamentally destructive. As such Beijing needs to choose: either collapse the economy in a deflationary wave, leading to a debt crisis and widespread social unrest, or devalue massively overnight in hopes of stimulating inflation, leading to collapsing profit margins, and even more widespread social unrest.

In short, our condolences China: having decided to adopt Western neo-Keynesian economics, with the typical monetarist bent, you too are now trapped with no way out. But don't worry: so is everyone else. Good luck.

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Pool Shark's picture



We are ALL Japan now...


Doña K's picture

So then, why not take the hands off the wheel and let markets dictate?

Pool Shark's picture



Tell that to Kuroda.


The Central Banksters envision themselves as Captains at the helm of the great Economic Flagship.


In truth they're just like Maggie Simpson:


(Beginning at 0:57)


JungleCat's picture

If you want to start the clip at 57 seconds, this is the URL to use: https://www.youtube.com/watch?v=SR8WWFzrZAg&t=0m57s

See the "&t=0m57s" tagged on at the end - hopefully it is self-explanatory. Very useful to know.

Money Counterfeiter's picture
Money Counterfeiter (not verified) JungleCat Jan 9, 2016 11:48 AM

We can hope they use their SDR to drain the IMF of liquidity defending the Yuan.  250,000 troops on the Syrian Israeli border would be nice.

Son of Loki's picture

Since the Fed hasn't done it for th elast 15 years, I doubt the Chinese will allow 'free markets' either.

Pool Shark's picture



15 Years?!


More like 102 Years...

Cruel Aid's picture

Yep and the ignorant americans keep allowing their loss of independence. Oh and its accelerating to the endgame.

friggin headshake

U4 eee aaa's picture

Markets are deciding. The currency war is market forces in action. Price discovery is soon going to show us what these pieces of toilet paper are worth. I suspect they will come down to the value of the goods they are able to manufacture, grow or dig up and sell

BennyBoy's picture

There is only one country in the world:  Keynesistan!

RiverRoad's picture

We'll all be more like North Korea unless they Q EEEEEEEE.

skinwalker's picture

Deflation will serve me well. 

Winston Churchill's picture

An overnight 15% devaluation seems the only course left to the PBOC.

Trying to manage a slow step one has failed miserably.

This weekend maybe ?

DeadFred's picture

My crystal ball seems to show the Communist Party losing control and being ousted, kind of looks like about 4-5 years from now. It's hard to tell for sure because there's a lot of blood between here and there that obscures the view.

the grateful unemployed's picture

one of the talking heads was saying the handling of the crisis has been more Maoist than modern Chinese capitalism. it may be the Maoists are gaining control. the political hardline in this country has been for regime change in China for a long time, we're tired of dealing with communists, but the reality may be further from the intended goal. China has a long history of pulling back into itself.

Publicus_Reanimated's picture

Do not underestimate the cruelty of the Chinese government or its disregard for its citizens' lives.  Read some history and you will find multiple periods in the last 200 years where tens of millions of Chinese died at the government's hands (no matter what that government's "philosophy" was) and nobody batted an eyelash.  And yet, who could have seen that coming...?

Money Counterfeiter's picture
Money Counterfeiter (not verified) Publicus_Reanimated Jan 9, 2016 12:05 PM

All governments kill to maintain power.  What do you think that Civil War was about in the USA?

Not My Real Name's picture

FFS. To equate the reason(s) for US Civil War with Mao's atrocities in China is a bit over the top.

RiverRoad's picture

It starts with the booksellers.

neidermeyer's picture

Blessed are the cheesemakers...

Sudden Debt's picture

monday, earnings will start to come out :)



two hoots's picture

I expect earning/rev to be low comparatively.   Think they have tweaked and leaned their business models about as far as possible.   Interested in Capex, layoffs, closings, spinoffs/sales, changes in divy, then try to decipher outlook. Another sign will be departure of high level management.  Think we know how most of this will turn out. 

R.R.Raskolnikov's picture

don't forget Apple's earnings release at Jan. 25.

stocktivity's picture

Apple will beat estimates...no matter what they have to do to the books.

r3phl0x's picture

They can channel stuff semi-legally for another quarter or two, but then it'll be a quick descent into outright fraud.

__Usury__'s picture
__Usury__ (not verified) Jan 9, 2016 11:01 AM

as Mako said many yrs ago...


''Those chinamen will be going back to the rice patties on the bicycles they road in on.''

boeing747's picture

Once you start printing money, you can choose print more or print less, but can't choose 'stop' printing.

bilbert's picture

The funniest part is that these numbers all the experts are so carefully studying,come from China, and are largely fictional.

Real picture is even worse than it looks.

the grateful unemployed's picture

they're not ficiton, they're inscrutable

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) the grateful unemployed Jan 9, 2016 11:19 AM

Well then, I guess that means you can't 'scrut' it

Pool Shark's picture



Your comment left me feeling gruntled.

[PS: It was 14 parsecs]

RiverRoad's picture

Same with us; we're just better at fakin' it than everybody else.

lordbyroniv's picture

China has the gold.


WINNING !!!!!!!!!!!!!!!!!!111111111

two hoots's picture

The only time trickle down works is with debt. 

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) two hoots Jan 9, 2016 11:20 AM

& watersports

Bossman1967's picture

Just BtFd as they are not ready yet we arnt at 20 trillion yet so at 100 billion a week there are 11 weeks before doomsday so buy more stawks up 500 pts Monday

Pool Shark's picture




Bring This F'r Down!!!

scintillator9's picture




Bet The F'r Drops

Pool Shark's picture



Bet The Farm on Deflation?

Omega_Man's picture

Do you think that the zios who run the US gov were smart enough to cook all of this up to try and cause unrest in Russia and China? Or is it happening naturally.

So why are banks sitting on trillions of dollars and getting interest from the FED?
We need to crush that system now and get that money into the hands of business, small business.

NotApplicable's picture

They don't really have to try very hard to cook anything, as debt saturation is an unavoidable natural phenomenon of a debt based currency. Next, add in ZIRP, and you've taken away the only check (interest being the cost of time) that keeps the system somewhat balanced.

It simply isn't possible for everyone to continually borrow their way to prosperity, as all actions have unintended consequences. Eventually, the real price has to be paid.

As for small businesses and the people that run them, until money once again becomes tangible (and thus scarce), there's nothing that can be done, as the current monetary system is but a wealth transfer system to those who are privileged enough to be close to the source.

Mr Pink's picture

I'm thinking the exact opposite

What if China's plan was to secretly accumulate 30k tonnes of gold while inflating the biggest bubble the world has ever seen.

Then when it bursts it takes out the western banking system and the fiat currencies with them.

China creates a gold backed currency that instantly gains world reserve status

The Merovingian's picture

You can't trust them, period. Why is that so hard for everyone to acknowledge? Assuming what you said were to happen, I find it really hard to believe the new G-Yuan would suddenly just spring into existence across the globe as the new 'go to' currency of exchange amongst everyone. Never going to happen. So I say it again .. you cannot trust the Chinese govt. Period. They are liars and killers interested only in consolidating and keeping their power .... just like all .govs.

It's time for Rollerball.

FreedomGuy's picture

Everything has to be a Jew for you fucking morons.

There are these things called "economics" and "finance". The rules are the same for Chinese, Christians, atheists, Jews and Aryans. When you violate them or break them there are consequences...no matter how many government interventions.

It is the problem for statist, all statists. They assert that they can manage infinitely complex economies and they cannot. Every stimulus has a price to pay on the other side. It's not a Jewish-Zionist conspiracy. It's macroeconomics.

If you study, you will find out why banks are sitting on their reserves. Go to them, tell them you are unemployed and try to get a loan. Or, tell them you make $30k a year as a barista in San Fran but need to buy a $500k 1 bedroom apartment. When they turn you down accuse them of being Jewish pawns sitting on reserves.

Better yet, tell them you are a home flipper and are working a six home pyramid on your $30k salary.

ThroxxOfVron's picture

Getting a loan today has more to do with who you are related to, where you went to school, who you know to bribe safely, etc.

...But, I you think that there aren't distinctly different rules for corporations or ethnically run enterprises from all points along the spectrum: you are a damned fool.


Hudson City Savings Bank just got bought up by M&T.  

The merger took quite a while, in part because HCSB was being sued by the FEDs for NOT making enough loans to minorities.

HCSB's loan book was what M&T wanted.  

Why?  -Because HCSB didn't loan money to indigents or into shitty neighborhoods.

HCSB got fined millions; but, the loan book that M&T wanted so badly was a direct consequence of HCSB's stringent lending. 


Take a look at the delinquencies in the region where HCSB was making loans.

Look at what they were avoiding getting suckered into only to be fined like criminals for it:




That Newark, NJ zip code has a fucking 43% DELINQUNCY RATE.



We can also talk about fractional reserve, commercial bank loan/emmissions, and counterfeiting -if you want to.

The fact is: the damned banks have little skin in the game and have control of the printing presses.

-They use their position to skim and tax our economy.  

Pure parasitism.

It is a perversion of modern monetary invention that should cease.

FreedomGuy's picture

I do not get how your point actually contradicts mine. It is still not a Jewsih thing. The Community Reinvestment Act goes way back, to the 70's I think. It became a hammer against banks starting in the 90's. In fact, it was one of the contributing factors to the housing melt up then melt down. It is also conveniently left out of the movie, The Big Short, but then perhaps that was beyond the scope of the story.

My point is that banks lend money when it is in their interest to loan money. They play by the rules as they are. Those rules are set by government. If they sit on reserves it is because it is a better play than lending them to Newark or the market, in general. It is not a particular Jewish or even banker conspiracy.

We can talk about fractional reserve lending and it is probably not what you think it is. No bank has a printing press. They have the power to leverage deposts about ten to one, usually. So what. You can do a margin trading account, too. This is how money is created. It is our system.

If you want to advocate for a 100% reserve, fine. Do so. If you want to advocate against bail outs in the future, no disagreement from me.

The system is what it is because of the power of government to do it.

Personally, I am in favor of multiple competing currencies issued by banks or financial institutions which we had in America for a long time. You can set up your gold reserve currency, then.