By Michael Every of Rabobank
Chinese data for August show it is moving again. Industrial production was up 5.6% y/y, above the 5.1% consensus; retail sales were up 0.5% y/y vs. flat consensus (though still -8.6% year-to-date); fixed-asset investment was -0.3% y/y vs. -0.4%; property investment 4.6% y/y vs. 4.1%; and, for those who are going to bother following the series, the jobless rate was unchanged at 5.6%.
So spending is up, marginally, but still well behind where it would have been in a normal year. Guess what? The same is true in Western countries: UK and US retail sales are both stronger than China’s measured in some ways; that’s what happens when you pump most of your stimulus into handouts to households. Chinese production is up much, much more, however. Which isn’t really a surprise when exports are running strongly due to global demand for the work-from-home stuff China provides, and as the equivalent of USD500bn in new credit was pumped in during August alone, and as the usual mega SOE infrastructure schemes are rolled out.
Of course, CNY loved this and has broken 6.80. Can it move much further than this? Well, until now the currency --which is not a free float!-- has been tracking the overall movement of the USD. If that keeps declining, then perhaps. There seems to be far less of a case to suggest China is suddenly happy with a strong currency ‘because it is going to be looking inwards’. How much deflation does a deflation-prone economy need? Ask the giant property developer who cut prices 30% for a month from 6 September.
Indeed, consider even as net exports mean major USD inflows in recent months, and as net bond portfolio inflows are up too due to the inclusion of Chinese sovereign debt in foreign bond indices --I continue to try to write the scenario where China is in any way restrained in its fiscal actions by what foreign bond holders think-- large net capital outflows continue. How else to explain that with all this cash coming in, FX reserves are still USD3.1 trillion (the magic level from which they cannot move)? Local money is moving out even as China is ostensibly ‘moving’.
Meanwhile, it’s not as if one cannot see bumps in the road. The EU-China virtual investment summit, for one. Germany’s Angela Merkel, true to neoliberal form on trade, suggested human rights issues are not the kind of thing to stop Germany from wanting to sell more German stuff. (Is anything?) However, China told the EU that human rights were its internal affair, a European problem too, and that it would take no lectures. The EU meanwhile insist China has to open up its markets and scaling back the role of its SOEs – just as China talks about a shift to internal circulation and as the same SOEs drive the recovery Europeans are salivating over. “China has to convince us that it is worth having an investment agreement,” said the EU’s von der Leyen. “We need China to move.” Will it? Or will the EU blink in the one area in which it sees itself as having global power? What does that say about its strategic options if it does – or if it doesn’t?
On which note, last night UK PM Johnson saw off a Tory rebellion to force through the first reading of legislation that seems to aim for a Hard Brexit and, according to critics, further strain on peace in Northern Ireland and union with Scotland. Boris says this is necessary to prevent the EU ‘blockading’ Northern Ireland’s food supplies; but will we really see EU bureaucrats sailing the Irish Sea like pirates to seize gold, silver, and Marmite? Suffice to say that either the UK or the EU need to move, and soon, or smooth EU-UK trading relations are likely to walk the plank. GBP and EUR with it, presumably….which then flows back to USD and so to CNY.
Meanwhile, in the US, TikTok is perhaps going to have a new ‘owner’, or rather licensee(?),… although that would seem to imply the White House doing a major policy FlipFlop (which is a great name for an app: I may now be able to retire immediately). Being overlooked is that Senator Tom Cotton --of whom I wanted to write the Daily headline “Just a Cotton-picking minute” when his name was, oddly, floated as a potential Supreme Court nomination should President Trump win re-election-- has introduced legislation to repeal China’s permanent most favored nation (MFN) trade status. According to Cotton, MFN status would depend on China’s behaviour annually. In other words, “we need China to move”.
China itself is sending a not-so-subtle signal of its own that it wants Australia to move: or at least that’s the interpretation Down Under of the sudden move to declare that Aussie wheat exports are to be subject to enhanced scrutiny for phytosanitary standards: add them to beef and wine and barley, eh?
Of course, the RBA’s minutes today couldn’t capture this further negative development, but the language on the AUD had already shifted. In August, we saw AUD “had also appreciated against the USD to be a little above where it had started the year. The AUD had been broadly in line with its fundamental determinants, such as commodity prices and interest rate differentials, which had returned to their levels at the start of the year”. In September we saw: “While members noted that the AUD was broadly aligned with its fundamental determinants, a lower exchange rate would provide more assistance to the Australian economy in its recovery.” Of course, nobody is going to actually sell AUD on this: the RBA needs to walk the walk rather than mumbling the talk – and it has almost no track record of doing so. However, a journey of 1,000 pips starts with a single step, as they say; and we can see which direction movement will ultimately be in (a lower AUD).
The same can be said for the movement regarding US-China links (away from each other), and for China itself (inwards: it does not attempt to hide what it is doing, after all) - but it cannot be said for either Europe, or the UK.