June 11th, 2012
in Op Ed
Written by John Lounsbury
The words deflation and China appeared in the same headline over the weekend at GEI News. What sort of stuff are they smoking over there?
Wait a minute!!! Over there is right here – I am the editor of that electronic rag and that was my headline. And whatever it is they have been smoking “over there” didn’t make it to my lungs so I feel cheated.
So let’s take a critical look at that “reckless” headline and see what is going on. This look is being written in an Op Ed because, although we will look at and try to interpret data, the examination is less thorough than this analyst wants to put in the Analysis Blog.
The news article was reviewing a slew of data released Saturday by the official Chinese government agency, the National Bureau of Statistics (NBS). The headline number, the CPI, was up 3.0% year-over-year, hardly a deflationary number. But, when you read further in the article you find that PPI was down 1.4% year-over-year. And that is where a deflationista’s ears should perk up.
It is not just the fact that PPI is negative that should get your attention, but also of note is the rapidity with which it got there: Just ten months ago the PPI rate of growth was 7.5%, so PPI has not only gone negative, it has gotten there via a massive collapse. And that is not all, other sharp declines in inflation measurements have also occurred. From the same article:
The intermediate goods PPI was 11.0% last July. The data for 1Q 2012 showed the PPI for agricultural products down 5.6% year-over-year and 9.4% in six months (-18.7% annual rate).
Numbers like these spell collapse.
Now, there are lots of indications that the Chinese economy is not disappearing into a black hole. Industrial production rose 9.6% in May from a year ago. As mentioned before, CPI is positive and food inflation still is very high at 6.4% (in spite of the collapse in agricultural PPI, which could bleed through to lower food inflation in coming months). Interest rates are still high by global standards, though cut last week, so there is a lot of room for monetary policy adjustment. Although much less than recent years China still has a positive balance of trade.
A closely watched indicator, the China PMI (Purchasing Managers’ Index), has been above 50 indicating expansion for five months, although the latest reading was just barely above the line that marks contraction. And there has been controversy about the PMI. The official number comes from the NBS which surveys mostly large and state owned enterprises. An alternative PMI survey by HSBC bank, which includes many privately owned as well as mid-sized and small companies has been well below 50 for eight months in a row.
And GDP growth is still booming at 8.1% for the first quarter. But China expert Michael Pettis has posited that China must experience reduced growth in order to have any chance for an orderly rebalancing of its unsustainable economy. However, his projection that China must average 3-3.5% GDP growth over the next decade to successfully navigate an economic transition to sustainability has been challenged with a wager by The Economist that the past rate of growth will continue, with China becoming the world’s largest economy by 2018.
Businessweek has a recent article by Dexter Roberts which is accompanied by the following graph:
The decline in several key metrics is over the past year is dramatic. There is one metric, fixed investment, where the decline has been more modest and appears to have stabilized. However, it is questionable whether the growth of fixed investment can be held at the high single digit level in light of the heavy industry declines that Roberts cites in the article.
Finally, I want to post again some official NBS graphs from the news article yesterday.
These graphs are the latest posted by the NBS. They have been annotated by the author to show the zero line which the NBS chose not to show (although they did on the corresponding graph for CPI) and where the preliminary May PPI number would fall on the graph. The upper graph is the PPI for finished goods and the lower graph is the PPI for intermediate goods. The NBS did not provide a graph for raw materials.
The bottom line is that there is no Armageddon yet looming for China. But there are some signs of a slowdown that could actually have deflationary components. And after the boom China has experienced for the past 20 years the type of slowdown that is envisioned by Michael Pettis, with any deflationary aspects at all, might be viewed by some as Armageddon.