46 Months Of Accelerating Deflation Mean Beijing Is Now Trapped
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:
- 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.
- 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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The irony is that the reason they fail is that they are all so greedy. Instead of keeping things humming along like a nice crop of slaves to be sheared on a regular basis, their greed drives them to be king of the heap. They can't have more that 99.999% of the world. They have to have it all so they are quick to stab each other in the back the first instant someone's back is turned
Greed is a moral concept not an economic one. It is actually a good thing when a billionaire wants another billion and opens or expands a new business...given that most of us are employees.
When greed turns to fraud then we do have a problem.
I like the line in the movie, The Big Short where Baum (a Jew, BTW) talks about the fact that fraud never works. He has uncovered the rampant fraud in the system.
Who is "they", Jews? Who are the slaves, us? Who made us slaves and why do we not know it? BTW, I know the answers to these but I suspect your answers are different.
Actually, greed is a moral failing. It is a human flaw that keeps us from understanding when enough is enough
wow you are totally misinformed...
Explain how. Go for it.
Entropy is not a conspiracy.
deflation: America's greatest export.
A gift to the poor
Do like Kuroda-san: go for the soft landing, otherwise do Seppoku.
P.S. Soft landings do not exist ;)
P.S.S. Let's hope that is going to be another crazy week to the bottom.
Social unrest, China turning into another Syria, Afghan, Libya...Good luck Weekend Tyler!
Not in a million fucking years.
U.S.A first biatch!
Might want to look a bit more at Chinese history. We may have had one civil war but they have had several. People are people no matter the former of government.
The Maoist revolution were made by Western agent (Zionist Jews !) much like the Russian revolution with Bolchevist with the Tsar !
Oy vey, this is antisemitic. Remember the 12 trillion!
Come again?
The U.S. has had one civil war, in its 250 year history.
Yes, China has had alot, in its 5,000 year history.
NEXT.
How much have you lost?
Well, actually it has had two. Tories vs Patriots. Rebels vs Yanks.
They haven't announced a date yet for FSA vs Producers but they are laying down new sod in the stadium to get ready.
They have 5000 years of history and they are not all one people, as commonly perceived.
When the USA is 5000 years old lets see how we've done. I personally believe that the self loathing cultural marxists of the Left may precipitate another civil war that will be uglier and more personal than the last one.
People have lived there for 5000 years, but hardly a nation that long. Their empires collapse with regularity. They are one famine away from a repeat. Solar minimums seem to be the triggers. There is a reason they are buying up Africa. They are not stupid, they can read the sunspots. However getting food from 6000 miles away is going to be a logistical and military challenge. They won't be the only hungry people.
Agree with your last sentence.
Probably BOTH about the same TIME dude.
(chill)
(ponder Mao meeting Kissinger in a bunker)
(because he had no other goddamn choice)
(not ancient history)
Every weekend same shit; China's fucked, social unrest is coming, death on the streets of China, down with tha communist party...
Absolute bullshit Tyler.
I live here, I have a business here (2)
Believe me, there'll be social unrest in the U.S. before here.
Sorry to disappoint you, Tyler Wolfowitz.
It was good to see a Spring flower of optimism in your post.
http://www.china.govoffice.com/
Let us know when the transfer station opens again.
Wow - a Chinese communist state apologist on a news site ...
(how rare)
I think the CCP are a bunch of fucking idiots, pussies and mongs...however, there'll be a Civil war in the U.S. before there is one here...FACT!
Apologist, me, no way...I don't apologize for anyone else...not since I was 24, and it was my ex girlfriends mother pissed up at a party!
Just when I was getting used to all the Russian ones...
Option 3, hang all the bankers.
The retirement age in China is 50 for women, 55 for men, as far as you want to collect monthly income from their Social Security and Medicare. Not much money but at least you can pay your rent and feed yourselves.
Happy Birthday Tyler and Crew!
They probably have Larry Fink telling them what to do too. Which is why the world looks like it does. The maggots rule the roost. Everyone else gets shit upon.
Whatever's good for Blackrock and the Squid, by god that's what we'll have.
If China needs to devaluate their currency than they are less able to purchase foreign goods. Apple will have a big problem, because China is their only growth market, resulting the their stock gowing down further, taking the Nasdaq with it.
Disclaimer: I mention Apple often, hwoever I am neither pro nor contra, despite the fact I frequently comment about it. Though, I do have a nice put expiring in 2018. So I would profit from it. Let that sell go on!
there has been pressure for china to grow its economy internally, now they have to
Yes - they have to "grow" their "internal" market. The last time an emerging asian state had to do this? - 1930's Japan ...
(that was interesting)
and the Japanese resist consumerism to a degree, they are savers not spenders. global policy was created to prevent Japan from finding resources. no such obstacles exist with China, but the global depression played a big role.
You can live without iPhones - but clean water and non-cancer causing food is necessary.
China has done tremendous damage to its limited food production capacity to make iPhones for Americans.
(that chicken will need to get slaughtered)
But yeah - it's about food, just like it was 50 years ago ...
The rich in China have access to clean food, and the poor there can dredge the sewers for poo fat.
Yes! I have long posited that China has a huge internal market available. However, when you do mercantilism you are priced for export. This and other factors lead them to be terribly unbalanced to properly develop an actual internal market based on supply and demand and the costs that go with it. When you are building entire ghost cities how can you price concrete, steel and construction workes properly? You cannot.
the other side of price controls is wage controls. they could guarantee a minimum wage to all Chinese workers. that would take the public pressure off, and push the Maoists back into the shadows. we're pretty much toying with the same plan here in the US. Bernie Sanders represents the American Maoists, he would be a much greater force for change if we had a parliamentary government which China does not have either. instead of allowing deflation to bring prices down you bring wages up to build a consumer society. China is a backward culture, unlike the Japanese, so it might take centuries.
what foreign goods? BMW's?
Environmental-friendly VW's
"...protracted price declines may encourage them to delay spending in the belief that waiting will result in still lower costs in the near future..."
Another Keynesian fallacy. By this rationale, no one would ever buy any electronic equipment since the price keeps falling, right?
The classic penetration of market model applies. There are always early adapters which leads to improvements in the product, followed by growth in market. Price starts to fall as volume leads to production efficiencies. High margins lead to further improvements in technology and production until competition catches up. At that point margins begin to compress and the market matures. Prices fall due all of the productivity and volume gains over time, along with competition leapfrogging the technology.
So why would any one ever buy in the first place if the price is destined to fall? (According to the "deflation means that no one buys" fallacy).
This is analogous to Zeno's arrow fallacy which surmises that the arrow can never leave the stadium because to exit, it must first reach 1/2 the distance, but to reach 1/2 the distance, it must first reach 1/4 the distance - etc... Yet we all know that the arrow leaves the bow and eventually finds its final resting place, having passed the 1.8, 1/4, 1/2 marks.
The article is correct depending on your time frame. Do you ever buy furniture that is NOT on sale? If Labor Day is this weekend and you know it is a huge sale do you buy today? Do you buy a home today if prices are deflating?
It's been a very long time since we had a long period of deflation. We may not this time either but if it happens...
I think the Tylers have nailed this one ...
China is in deep trouble (yes, so are we), and because of this about the only option left is some kind of "war agenda" - much like Japan in the 1930's.
These are dangerous times.
The Roosevelt political Dynasty ended after one generation.
Another random braincell ticked.
(get back to the casino table rain man)
You win - maybe I was being a dick.
(cyber-hug)
I hate to admit this (Coz personally I think you're a cunt)...but you're spot on with your comment.
+100
Grrrr....Cunt.
I can be a cunt sometimes.
(damn)
If people think deeply enough about the historical comparison, which country was the up and coming industrial power during the '30s?
It was the US.. And it was our industrial capacity.. that eventually prevailed over the Europeans. And during the depression much of that capacity was underutilized.. Until WWII...
It would seem that China is in that situation now.. A lot of industrial capacity looking for demand and utilization.
And while London was the primary financial center prior to WWII, with its global empire.. now it would seem the US holds that role..
We all can see the war clouds gathering.. if we only pay attention..
Scrutinizer
Everything is going to have to fall until an economic homeostasis is achieved.
It means lower wages, but it also means equally lower prices and profits. As well as lower tax receipts.
The people are already dealing with the lower wages...they've done their part.
So now we just wait for the others to do theirs...Business and Government are just going to have to cut back THEIR expectations and get with the program here.
We here in the US, with our 350 million people, have apparently failed to get our leaders attention. Perhaps China, with its 1 and a half BILLION, can get the message across to its leaders.
If we fall apart here, it will be ugly, but I don't even want to THINK about what it would look like there.
It will all balance very well if you leave it (the economy) alone. However, it is a painful process along the way. Imagine if you had hacked down and acre or two of rain forest to make an English garden ( I pick that because they have a positive feel). The process of returning to the normal, stable and adaptable rain forest will be ugly.