I recently pointed out here that China’s credit impulse, at least for the time being in this cycle, is significantly lagging behind the momentum of previous cycles. Considering the overall structural situation in the Chinese economy, this is not surprising. At the same time, this economy has now found itself in a very atypical situation – while the rest of the world is dealing with high inflation, China is in deflation. According to some opinions, he has a “pig” nature.
Although inflation is mostly falling in developed countries, we are still far from an environment of disinflationary or even deflationary pressures. Not so China. As the following graph shows, overall inflation here is close to zero, core inflation is slightly above it, and both are trending down. The GDP deflator is already very much in the negative:
Source: X, SocGen
The mention of “pork” deflation is related to the following graph from Yahoo Finance, which relates the price development of this commodity to overall inflation. In addition to pork, according to some opinions, the transport sector is also significantly affected by deflationary pressures:
Source: Yahoo Finance
Albert Edwards of SocGen mentions high debt* in connection with the first chart. The reason is simple – an environment of higher inflation is generally said to be one that reduces the debt burden. And there is a transfer of value in it from creditors to debtors in the event that rates move above those at which debts are charged interest. On the contrary, (unexpected) disinflation or even deflation increases the debt burden by itself (and transfers wealth from debtors to creditors). According to the described development, China is therefore clearly moving into the second group, while debts have already become an important economic issue for it.
Here, too, I am far from extrapolating the above into some crisis predictions and the like. However, it seems that debt pressure will increase in the described environment and this (again) reduces the scope for the traditional stimulus policy of the Chinese government. After all, the narrowing or non-existence of this space is also evident in the weakness of the credit impulse mentioned in the introduction. At the same time, the mention of pork would indicate that on side of deflationary pressures is a more cyclical phenomenon. However, overcapacity in general may be a more structural phenomenon in the case of China in some sectors.
What does the above mean for developed countries still struggling to reduce inflationary pressures? I recently described here the principle of monetary policy functioning as an expansion vessel – the central bank balances the influence of various factors in order to achieve its goal. From this perspective, the export of Chinese deflation simply means less need for monetary tightening in countries with higher inflation.
But we can then logically ask why this principle should not work in China now – why the central bank there and co. it also simply does not balance the pressures so that deflation “doesn’t happen”. The short answer can be as follows (and is related to what was written above): The deeply engraved stimulus channels there are increasing (especially debt) imbalances that are already too large. From this point of view, the tap to this expansion vessel is therefore rather closed (the dampened credit impulse).
*Mr. Edwards on X in connection with the above also points to the statement of a high representative of the Chinese Bureau of Statistics. He said, according to the FT, that “deflation in the Chinese economy does not exist and will not exist.” I note that if the head of a central bank came up with a similar statement, it could be seen as another version of “whatever it takes”. In such a case, such words are an active tool of monetary policy, they have meaning and function as self-fulfilling prophecies. If a representative of the Bureau of Statistics in China says something like that, it may be something else.
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2023-08-11 15:24:00
#Pork #deflation #export #world #economy
