We can start our look at China and its economy via this morning’s update on what is happening with inflation there.
BEIJING, Aug. 9 (Xinhua) — China’s consumer prices gained mild growth in July as the domestic consumer demand continued to expand, official data showed Friday.
The consumer price index (CPI), a main gauge of inflation, was up 0.5 percent year on year in June, slightly higher than the 0.2 percent increase in June, said the National Bureau of Statistics (NBS).
As you can see we now have a slightly higher annual inflation rate. If we switch to the National Bureau of Statistics release we see that it was because of a strong month figure.
In July, the national consumer price index rose by 0.5% month-on- month , of which the urban price rose by 0.6% and the rural price rose by 0.4% ; food prices rose by 1.2% and non-food prices rose by 0.4% ; consumer goods prices rose by 0.4% and service prices rose by 0.6% .
The Financial Times reported it like this.
China’s consumer prices rose faster than expected in July, according to official data, easing concerns over persistent deflation in the world’s second-largest economy.
As you know I am not a fan of people being made to pay more for things. But looking at the monthly detail in the official release I note that it was food prices which were the main driver so let’s look in more detail.
Among food, the price of fresh vegetables rose by 9.3% , affecting the CPI by about 0.18 percentage points; the price of eggs rose by 3.7% , affecting the CPI by about 0.02 percentage points; the price of livestock meat rose by 0.8% , affecting the CPI by about 0.02 percentage points, of which the price of pork rose by 2.0% , affecting the CPI by about 0.03 percentage points; the price of aquatic products rose by 0.4% , affecting the CPI by about 0.01 percentage points; the price of grain fell by 0.3% , affecting the CPI by about 0.01 percentage points; the price of fresh fruit fell by 0.3% , affecting the CPI by about 0.01 percentage points.
It is not clear to me that the Chinese paying more for fresh vegetables and eggs represents an end to deflation. That is reinforced by the sharp rise in the price of pork the Chinese staple something that we know can be volatile. Are these just simply a response to a summer of unfavourable weather.
China is enduring a summer of extreme weather, with unseasonable heat searing parts of the north and east while torrential rains have triggered floods and landslides in central and southern regions. (hongkongfp.com )
So I am no fan of the deflation is over argument based on this and Chinese workers and consumers will be even less so as they pay more for food and thus have a higher cost of living.
Producer Prices
I also note that these are still falling.
In July 2024 , the national industrial producer prices fell by 0.8% year-on-year and 0.2% month- on-month, the same as the previous month; the industrial producer purchase prices fell by 0.1% year-on-year and month-on-month . On average from January to July , the industrial producer prices fell by 2.0% year-on-year , and the industrial producer purchase prices fell by 2.2% .
The annual rate of decline has slowed but that may change again soon as we saw monthly rises last year in both August (0.2%) and September (0.4%).
Property Prices
We have been noting the way that Chinese property prices have been depressing the economy and earlier this week the South China Morning Post interviewed Mao Zhenhua.
In 2021, I drew the conclusion that in China – like many other parts of the world – we do not need so many large real estate companies. The Chinese real estate industry was in oversupply.
Then he compares the situation with Europe.
This has two profound implications. First, rather than recovery, the real estate sector could disappear as a ‘pillar industry’. In European countries, especially those where population growth is slowing, you don’t see a large real estate industry or large real estate companies because they already have enough inventory.
In itself that is significant for a sector that at one time was 30% of GDP growth and then he makes a point I regularly have.
Second, a downward trend of prices could lead to other big problems, such as the contraction of household balance sheets.
That would be a touch of The Vapors.
I’m turning JapaneseI think I’m turning JapaneseI really think so
He also reinforces the theme that the real estate industry remains too large.
Over the past few years, although real estate investment has declined, annual volume is still not small. Compared with the peak in 2019 and 2020, supply is much smaller, but if you look back, it is still a relatively large figure compared to 2015 and 2016.
From that his policy prescription is unlikely to surprise.
My suggestion is to impose restrictions on supply, with a freeze on new construction sites and projects. This would send a clear signal to the market that supply is limited.
The issue here is that whilst the media gets very excited about deflation I am not clear they understand it. I take it as a fall in aggregate demand and this is his prescription albeit he proposes it to avoid a larger fall later. There is also a larger estimate of house price falls than we get from official sources.
But with real estate prices going down, their debt situation has deteriorated greatly. Prices have fallen by 30 per cent or 40 per cent.
We can see from that and the numbers below why he has concerns for household balance sheets.
The problem of Chinese household debt is very serious. In 2007, before the global financial crisis, the ratio of household debt to gross domestic product was about 18.9 per cent. By the end of last year, it had climbed to about 69 per cent.
Households used almost all of the increased debts to buy real estate.
Putting it another way there is a lot of negative equity around these days.We then switch to a policy prescription which is Helicopter Money in another form.
Starting from 2020, I recommended economic stimulus in the form of consumer vouchers be given to those who had been hit hard by the pandemic.
How much?
Over the past two years, I have proposed to offer consumers 10 trillion yuan (US$1.4 trillion). On paper, this is a very large figure. It represents about 8 per cent of GDP, surpassing the current red line for the fiscal deficit at 3 per cent of GDP.
He tries to tell us it is not a big number.
It’s not a small number, but it’s not a big number either.
Comment
As you can see the issue of the Chinese property sector continues to act as a drag on the economy and the beat goes on. There was another signal of trouble in this sector in the inflation breakdown. Rents rose by 0.1% on the month making the annual rate -0.3%. This is very different from the UK and US for example where rents have been pulling inflation higher.
China continues to be in an economic trap. At what point do you think they will give Helicopter Money a try? The catch with it is that you are effectively socialising private debt…..