By Greg Lai and Alex Hsiao, Co-Chief Investment Officers
Moving from questions of rates and inflation in developed markets, we decided to look at prices in China in search of clarity on the direction of the world’s second-largest economy by GDP. Whereas rising prices have been a big problem for Western central banks, investors follow CPI in China, hoping for a rise. That’s because upward pressures on prices could indicate recently weak sentiment and sluggish activity on the part of consumers might be turning a corner, pointing to a return to growth and a rebound in its stock market, down almost 8% YTD as of last Friday.
Prices point to weak economy
Last Monday, consumer inflation sent just such a signal when China’s National Bureau of Statistics reported that August CPI tallied a 0.6% year-over-year increase. Despite falling short of economists’ estimate of 0.7%, it improved over July’s 0.5% year-over-year rise and the most annual progress witnessed since February. Unfortunately, producer prices released showed a 1.8% slide in PPI year-over-year, far worse than the 1.4% consensus estimate, not to mention the 0.8% drop one month prior (see below).
In fact, even the seemingly decent headline CPI was something of an illusion, as food prices jumped 2.8% year-over-year in August due to heat and rain. Core CPI fell from 0.4% in July to 0.3% in August, marking its lowest since March 2021.
Trade points to soft demand
Taken together, such data points to extremely weak consumer activity and excess production capacity. That’s consistent with the type of stimulus China has seen over recent years, which is focused more on boosting manufacturing with little support for consumption. Trade data released by China’s Customs agency indicated the same trend: exports rallied 8.7% year-over-year. In comparison, imports grew just 0.5%, short of the 2% economists expected and miles off last month’s 7.2% increase.
Demand stimulus seems a must
Strong exports may serve to distract from China’s languishing domestic economy. In fact, exports are probably exaggerated due to front-loading of shipments by producers trying to get ahead of escalations in trade tensions. A soft landing for the global economy would likely keep outbound trade going strong, which helps to support sagging growth. However, we believe policymakers will need to make greater efforts to stimulate demand—programs encouraging consumer trade-ins, for example—before real progress can be made in turning China’s economy around.
Disclosure: Reprinted and revised with permission from Rayliant Investment Research in partnership with Affinity Investment Advisors. The following article was originally published on September 16, 2024.
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