Is the economy seeing a China Crisis now?

Today has seen some odd analysis from the BBC on China as it tries to imply that low inflation is bad. I somehow doubt that Chinese consumers and workers would agree with such analysis!Especially if they consider that the long-term deflation panic implied is based on what may be a much shorter-term decline in the price of crude oil and other commodities. I guess that BBC journalists will be pleased it is about to cost them a little more to fill up their cars with petrol or diesel due to the recent rally in the oil price to US $58 per barrel for Brent Crude! Can they please fill up mine too?

What numbers were released?

Actually we saw what would before these times have been described as something of an economic nirvana.

In January, the consumer price index (CPI) went up by 0.8 percent year-on-year. The prices grew by 0.8 percent in cities and 0.6 percent in rural areas.

 

So very gentle inflation close to zero,what is not to like about that? Also I note that relative price changes are in existence too.

Of which, the prices of eggs went up by 8.3 percent………(price of pork was down by 5.3 percent, affecting nearly 0.17 percentage points decrease in the overall price level);

 

I raise such a point because it is so regularly claimed these days that this cannot happen in a low/no inflation environment. Well it has just happened in China if not in the textbooks read by such individuals which must be quite thin by now with all the chapters they have had to tear out of them!

Indeed there is a deeper theme here as remember the argument that rising Chinese consumption of pork will push pork prices higher as China gets wealthier? Well the price of pork has fallen below the levels of 2010 as we wonder if another bubble has burst. The price now of lean hog futures (h/t @auaurelija ) is 61.27 compared to a peak of over 130. Please do not misunderstand me as I have written on here myself wondering what the long-term impact of likely rising Chinese consumption of pork will be? What I mean is that such thoughts right now need to adjust to a reality that is quite different not plough on regardless.

Another difference

The Chinese numbers demonstrated a distinction which I am seeing time and time again as I look at inflation data.

The prices of consumer goods went up by 0.5 percent and the prices of services grew by 1.3 percent.

 

Goods inflation has fallen into the low/zero/negative zone whereas services inflation is chugging along still.

If we look for the impact of the lower oil price there is a category for “fuels and parts for vehicles” which has fallen by 18.3% in the last year so we see a clear influence there. Like the UK domestic fuel prices (-2%) have not followed the oil price lower by much.

What is coming next?

The producer price sector offers us a clear guide to what is building in the inflation chain and it is giving a clear signal.

In January 2015, Producer Price Index (PPI) for manufactured goods decreased 4.3 percent year-on-year, and decreased 1.1 percent month-on-month. The purchasing price index for manufactured goods went down by 5.2 percent year-on-year, and decreased 1.3 percent month-on-month.

 

These are substantial falls and the main drivers here are clear to see.

The year-on-year purchaser price indices for fuel and power decreased 9.9 percent, ferrous metal materials decreased 9.6 percent, chemical raw materials went down by 5.5 percent, non-ferrous metal materials and wires fell by 4.8 percent.

 

I have written before about the falling Iron Ore price which has dropped this week to the lowest levels since May 2009. The front month future (62% content) is at US $61.76 as I type this as opposed to the US $190+ of February 2011.

The South China Territories shiver

I have written before about Australia and perhaps Western Australia in particular being named as the South China Territories in the comments section on this blog. Well you might like to sit down before you see a consequence of this from the Australian newspaper.

In one of the starkest signs yet that the resources boom is over, a house in the Pilbara mining town of Port Hedland was passed in at auction for $360,000 at the weekend after it was bought for $1.3 million just four years ago.

 

Whilst this is an extreme example it is not out of kilter with developments.

The median house price in Port Hedland has fallen about 23 per cent in the past two years, according to the Real Estate Institute of WA.

 

But the national picture is different.

The weighted average of house prices across Australia’s capital cities rose by 1.9 per cent in the fourth quarter from the preceding three months, the Australian Bureau of Statistics said today.

 

Chinese house prices are falling

The numbers and methodology are a bit obtuse here but the message is like one in a bottle.

Comparing with the same month of last year, the sales prices of second-hand residential buildings decreased in 67 cities, and that of 3 cities increased. In December, for the price changes year-on-year, the highest increase was 1.8 percent, the lowest was down by 12.5 percent.

 

This is not the message that has been beamed out to the world as looking back I saw this from Reuters in December quoting a property developer.

The property market should not get worse in future,

 

Trade

Such numbers are notoriously unreliable but this from Xinhua News is worrying.

Exports dropped 3.2 percent to 1.23 trillion yuan and imports slumped 19.7 percent to 860 billion yuan, making the trade surplus expand 87.5 percent to 366.9 billion yuan, according to the General Administration of Customs (GAC) data.

 

Who do they blame?

The GAC data showed that China’s exports to the EU and Japan dropped 4.4 percent and 20.4 percent, respectively.

 

So we see that China has exported less for which it blames lack of foreign demand. But on the other side of the coin it has imported 19% less a lot of which will be caused by falling oil and commodity prices.

However you spin this situation it poses a question when you add in this.

The index, a key measure of factory activity in China, posted at 49.8 in January, fell below 50 for the first time since October 2012, while the new order index was 48.4, also lower from December’s 49.1.

 

Comment

The trade figures provide several themes here as there is a clear hint of a cooling Chinese economy. However if we look at a larger trade surplus I am reminded of the arguments that one way of looking at the problems pre credit crunch was to look at the surplus nations. How is that going? Well China is powering ahead in trade surplus terms apparently and Germany?

The foreign trade balance showed a surplus of 217.0 billion euros in 2014, which was the highest value ever recorded.

 

I am awaiting signs of progress of what former Bank of England Governor Mervyn King would call “rebalancing”.

If we return to the inflation theme there is much to consider. In officialese, if I may put it like that we have a fast rate of economic growth accompanied by low consumer  inflation which as I pointed out earlier was once a form of economic Holy Grail. But unofficially as we wonder if falling demand was the cause of the oil and commodity price falls and now we see signs of asset price disinflation too we wonder what is actually happening here? The word deflation is regularly bandied about but a list of the building blocks for China is starting to acquire some ticks on it.Of course as time goes by the lower prices will in themselves help to provide an economic boost which is the bit usually missing from any disinflation/deflation discussion. So was the good news story described by China Crisis back in 1983?

It’s just wishful thinking

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12 thoughts on “Is the economy seeing a China Crisis now?

  1. Hi Shaun.
    If you had read much of the BBC output in the recent Scottish Independence Referendum campaign, you’d know that this once-proud institution has fallen to the level of Govt. mouthpiece that Ceausescu would approve of.

    • Hi therrawbuzzin

      It is the intellectual laziness that the BBC often displays. Early in the credit crunch era I requested a right of reply to the World Service (which I used to like a lot) to correct some factual errors made about Greek bonds in the early days of the crisis. Instead I ended up making a complaint which the BBC Trust rejected on the advice of a man whose only qualification was in complaints handling!

      Last night on BBC News 24 on The Papers the presenter kept telling us that UK wages had been falling since 1990. Perhaps he is no expert and made a simple mistake but someone should have corrected him as he kept repeating what was rubbish. Real wages are a different kettle of fish.

  2. The falls in prices for manufactured goods versus a rise in prices for services is something which makes sense economically over time. Manufacturing would seem to be too efficient and churns out too much “stuff” so is a victim of its own success. This effect will probably become even more important to the world economy as time goes by so we need a rebalancing there too and maybe use some of the excess manufacturing capacity put to a change of use to clean up the various environmental messes we humans have left all over the planet.

    • Hi Jan

      As long as there is a ready supply of commodities then I agree that we can expect further and further gains from manufacturing. I find the services issue more complex as I wonder how much which is price growth ends up being measured as economic growth? In many areas whilst the concepts may be clear the practice is much harder. How do you grade a haircut for example? What about government services? I looked at this before when I helped Pete Comley with some technical advice on his book The Inflation Tax and the price/deflator measures for this area are if we put it politely something of a joke.

  3. Hi Shaun
    The Central Committee is struggling with its credit bubble and paranoid about its employment situation. ‘Rebalancing’ is literally a do or die effort. Staying in power is all that counts. Could get very messy.
    Oz could catch pneumonia.

    • Hi JW

      The Central Committee will discover that juggling loads of balls at once is not easy! There are the firms who collateralised Iron Ore and property developers and so on who must be hurting right now.

      Can the lower oil price get there in time?

  4. The situation in Oz is made worse by it’s reliance on coal/iron ore exports.Given that,the hosuing market makes next to no sense on the East coast.

    Perth will empty out substantially.

  5. Hi Shaun, the China thing was expected (by me any way!) as their M1 started falling very quickly about mid 2014 and is still falling, in fact, we’re no longer talking about falling M1 growth but outright shrinkage so I expect worse to come from China for the forseeable future.

    I’d like to comment on the so called falling demand for oil/commodities. Everyone trots this out as the reason for falling commodity prices and on it’s own it sounds like world demand has/is falling.

    Remember the so called “Commodities supercycle” a few years ago of which I was very sceptical? I looked at analysts predictions for oil usage and some showed exponential growth over coming years!!! That would be now. Consider, if the oil companies swallowed this and commissioned massive exploration and development of fields hitherto considered uneconomical but no longer so, looking at a quickly rising oil price due to oil consumption being predicted to rise very quickly, then, about now would be when all that development would be coming to fruition and more oil arrives looking for a market where consumption is at least growing 10% pa (according to analysts 6 or 7 years ago) but finds consumption has only been growing at a “poxy” 1.1% pa or thereabouts and you have a glut (given that the world was marginally under supplied a few years ago) which is then explained away by a “fall in demand for oil” – measured against the bizarre predictions of analysts of a few years ago yes, but measured in absolute terms then no, in fact there has been an increase in oil consumption, just not big enough to cover the immense supply increase. A good analysis appears here – https://surplusenergyeconomics.wordpress.com/2015/01/14/43-oil-where-next/

    Unfortunately, I was reading in the latest slew of documents from the IMF that they have numbers demonstrating outright falls in demand for oil over the last 5 years. I find this hard to believe as had that phenomenon occurred then given the immense increases in shale/oil sands which would pull more American demand out of the global market we should have been faced with prices of circa $20.00/barrel or less.

    The same argument applies to metals etc.

    I am now expecting a series of company failures in China iro the ones who have been borrowing using iron ore etc as collateral.

      • Thanks Shaun, interestingreading. My final impression would be that both explanations have a part to play but that also the authorities won’t let major oil producers go bust. I have bno idea how they would stop it as they c;early have their own funding issues but if a major producer claimed it was insolvent then I think it would be a case of Aut inveniam viam aut faciam.

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