China Inflation – the Big Picture, the Big Beneficiary, and the Big Surprise
China just released its December inflation numbers: Consumer Price Index (CPI) 2.1% vs 2.2% expected and 2.3% previous, Producer Price Index (PPI) 5.5% vs 4.5% expected and 3.3% previous. Here’s an overview of the key issues for investors, important economic trends, and a look at some of the main charts worth watching.
1. China Inflation Picture
chart below shows the trends in consumer, producer, and property price inflation. While consumer price inflation has been fairly steady, it’s when you look at property price and PPI inflation that things get interesting. China’s property prices have been surging (on the back of rate cuts, tax cuts, and regulatory changes introduces in 2015 and early 2016), and partly as a result there has been a massive turnaround inproducer price inflation. Indeed, the two often track each other as higher property prices often ends up flowing through to increased aggregate demand. Whatever way you look at it, the inflation picture in China right now is very different from a year ago, and soon the PBOC may need to stop thinking about stimulus and start thinking about interest rate hikes.
2. Upside For Emerging Markets?
One potential implication of rising PPI inflation in China is the seeming link it has with emerging market equity performance, as shown in the graph below. This could make sense from a couple of angles: part of the reason for the lift is due to rebounding commodity prices (good for those within EM exposed to commodities), similarly China PPI often rises when theglobal economyis performing well, and PPI often responds to stimulus in China (good for China driven demand). So while it could be different this time, if the trend continues there could be more upside in store for emerging market equities.
3. The Big Surprise
As I noted in the2016 End of Year Special Editionof the Weekly Macro Themes, one of the big surprises of 2016 was the turnaround from PPI deflation to (surging) PPI inflation. I think some of this reflects the fact that ‘pessimism springs eternal’ on China macro. That is, most people refuse to believe that there can even be a cyclical upturn in China, and when it comes they explain it away and dismiss it. There’s certainly risks, vulnerabilities, and structural challenges in China (AND pretty much every other country for that matter!) but for now China is in the midst of a cyclical upturn driven by stimulus, rising property prices, and a more benign export backdrop. There will be a time to get bearish, but it’s not yet (and yes we are watching a series of key indicators on that front, and these will be covered next week in theWeekly Macro Themes).
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