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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For me Falun Gong is just a cult. Their behaviors are very rediculous.
Actually, Christianity is spreading rather quickly and silently.
Chinese people are not bad. Transitioning from an autocratic government is not easy to do but easy to criticize. I will give the Commie leadership credit for watching Russia crumble and rebuild while understanding they needed to have some market type economy. Whatever you want to say, it is far better than the Mao days.
Aren't Falun Gong the sarin people ??
You're confusing Falun Gong with Aum Shinrikyo in Japan.
http://www.huffingtonpost.com/2015/03/20/tokyo-subway-sarin-attack_n_689...
Scrutinizer
The next week will be a very interesting one.
I have been to China many times in the last two decades. The inflation is quiet bad. Unlike American, all Chinese complain about inflation and they are very sensitive about price increases. There is nearly no voice calling for more inflation. People seek low prices. I hope we understand the difference.
I don't agree that China is faced with a not resolvable dilemma. A sufficient devaluation of the Yuan should help to increase exports and strengthen the domestic industry: China needs to import less and export more.
Entropy IS NOT a conspiracy ...
https://www.youtube.com/watch?v=X6BJ576rC3Y
Eastern Europe is the new China, the Chinese people are no longer going to provide free labor for the planet. if the leaders don't address the problem there will be regime change. its a matter of unwinding the China market in an orderly fashion. kind of like using a bungi cord for a hangmans rope
What are the arguments for inflation properly being anything but zero?
If non-zero inflation is proper, what mechanism dictates what that non-zero value should be?
Chronically imbalanced situation becomes more imbalanced.
Decades of Japan and USA style low growth to stagnation to come, CPI neutral to deflationary.
Michael Pettis is apparently right, the rebalancing will not be even a little voluntary, but will occur anyway, exquisitely painfully.
So lots more toxic stimulus spending to come. They'll do it until it just doesn't work, and given the rate of explosive debt growth (and corruption/misallocation) it won't be too long until stimulus becomes ineffective.
Element, That's not at all responsive to my questions.
China will dump UST (U.S. Treasuries) the way an animal, fleeing a predator, takes a dump ...
(relieves itself)
(for the sprint)
(for speed)
If you understand what I just said, you will ponder - and not react.
Lifting the ban on selling stock and short-selling would help. Why not give it a shot? It's the one thing they haven't tried.
what ever happened in China happened in the west first... as who else was to stop buying their stuff to cause the slow down... and what did we buy it with? Borrowed ponzi money credit. So the problem is here! Give us helicopter money so we can buy more chinese stuff and then can stop reading about China
There might be "100% OFF SALE" soon ...
https://www.youtube.com/watch?v=BRqKpanzDQw
Dude! Dude... that is a great video. I really enjoyed that. Thanks
it always bothered me when the neo economists drag out the old "consumer's will wait to pay a better price in a deflationary market. consumers wait for a sale that looks like a discount to the current price. they don't wait for some future price. the only reason they wait for a future price is affordability. you would think these academically constrained number junkies would have seen the the sales trajectory of new tech from vcrs to lap tops. vcrs went from 800(1980) dollars to less than 50 bucks over the course of several years. how many people waited until the price went below 100 dollars. if i had waited for cheaper desk top i wouldn't have bought one for ten years after they came out. i am on my 5th one even though one i have owned for ten years was finally overwhelmed by microsoft and windows(the new plannned obsolecense. we will just make it not work anymore. you have had it long enough).
the devaluation of the yuan, at some algo determined point will encourage a massive import of outside investment taking advantage of the strong dollar to buy things cheap. 2015 already set a record for outside investment in china. isn't this the real fulcrum in the balance of currency teeter totter? just a coupla years ago, had china decided to let the yuan float, the yuan would have strengthened against the dollar and its economy shattered. it now has the "luxury" of being able to devaluate against the dollar and join all their mercantillist buddies in their favorite game. it is a bit more complicated now that china has currency swap agreementrs with all its trade partners. the implications for the dollar are dire if china is able to depeg from the dollar while increasingly becoming less dependent upon it. the yuan is already used in more interntional transactions than the yen. it is near 4% with a bullet. there is a tipping point concerning the dollar because the the other important currencies, the yen and euro, are just quasi dollars where the yuan(and increasingly, the ruble) is much more independent therefore a rival currency. mat what point does the this affect the value of the dollar in terms of demand as a function of price? is this the inflation the fed is defending itself from with this stupid rate increase, raising rates to increase demand for the dollar? so lack of demand doesn't deflate its purchasing power?
this currency war will spawn a million phd economists and some bernank will appear in the future claiming to know all about it and still not know what to do.
Everyone's in trouble-across the board, and at the same time. Don't you fret, now, Mrs. Murphy, a gentleman's gonna come along and make it all better (for a little while), for a price..........
1010011010
Well, to tell you the truth, in the midst of all this China-doomed-any-day-now excitement, I kinda lost track myself...
Who again, does China owe?
And the who does the U.S. owe?
Thanks ---
This is how it works:
China sends real products to USA, made from real materials that China must buy and manufactured with real labor that China must pay.
Then China, to avoid excessive over-valuation of its currency and the economic & social problems associated with that, uses its USD products revenue to buy USA federal government debt, to absorb the USD from the exports to USA.
Then USA federal government just pays interest and principal to China on USA debt using virtual USD created by with just keystrokes on computers at the US FED-Treasury virtual reality complex.
NET RESULT
USA gets real stuff, China gets virtual stuff.
Also referred to as "Manufacturer Financing"..
US bonds don't act like debt at this moment in time. US Government bonds act like gold. US Government bonds will stop acting like gold if the full faith and credit (US military) becomes ineffective.
Big changes in China through free trade going to rock some boats over here.
There is no protection for other economies.
Will one of you doom & gold cult worshipers, who have been ranting ad nauseam for years about how the USA economy MUST collapse immanently, federal government will be bankrupt, USD will be worthless, US treasuries will default, AND ESPECIALLY how China and its currency, with all its magical gold shiny-shit piles, will overtake the USA and its currency,
please explain how the world gets there from where China is now ?
I promise to keep an open mind and analyze your response very objectively.
[I can keep this promise because I had surgery and the anesthetic has not dissipated yet]
All those growing welfare parasites in food stamps and disability are going to keep the usa government running, amirite
The usa is toast. The first to panic is first to win. Russia and China are ahead. Europe, japan, and usa are last. Russia and China can collapse their currency, blame it on the central bankers, and gain public opinion to retake their central bank, issue their own money isued at 0% for tye common good (roads, highways, mass transit, etc) backed by hard assets, of which russia and China have plenty, while the usa can cannibalize itself by having a larger and larger portion of its population subsidized by socialist communist programs such as welfare, disability, social security, obamacare, etc. In exchange for such zombie nation cinsumption, the western nations can sell 100 usd oil cost for 25 usd (subsidized by the completely useless zombie) and ipads and trampoline shoes.
Hope this makes sense. Have fun with your socialist medical insurance and wizard of Oz medicine that probably could have been cured with a proper diet and food, but which sadly doesn't exist in usa unless your one of the ones who tell everyone organic is worthless while eating 500 usd/plate 8f organic.
You are clearly not an American (islamic cult vermin scum?) and clearly obsessed with hatred for America, which just translates into you being irrational and just wishing, imagining and fantasizing about America's demise vs having any rational pragmatic explanation for the changes in global power that you yearn for. What you wrote is self-delusional fantasy garbage unworthy of reading. I take great pleasure in knowing that the continued dominance of the the USA, USD, etc are an irritation to you and I hope it results in cancer.
I can keep this promise because I had surgery and the anesthetic has not dissipated yet]
I guess that anesthetic wore off a litle quicker than anticipated Innvest..:)
Shit from an asshole, probably islamic biogarbage, acted as a quick antidote :-)
...or just find someone to go to war with.
I'ts always worked for the U.S.
I'm getting fat on all this popcorn I am eating watching it all unfold this year. best show on earth.