A global deflationary shock is building in China

Societe Generale with the note:

The economic recovery in China continued in April but remained uneven. Growth in the industrial sector softened albeit at a still healthy pace, while services failed to strengthen further despite the containment of COVID-19. On the demand side, manufacturing and property investment quickened, but infrastructure investment slowed, probably due to policy normalisation and debt de-risking. Retail sales also decelerated again. Thankfully, external demand remained robust, supported by the re-opening of demand from key developed markets and benefiting from supply bottlenecks in other emerging economies amid a resurgence of the coronavirus. Consistent with the disappointing consumption recovery, CPI remained tepid, but the surge in PPI, caused by base effects and up stream inflation, spooked the market.

For now, the recovery remains too uneven and fragile for the PBoC to invoke the blunt tool of rate hikes. The lack of a reacceleration of consumption is particularly worrying in light of an almost inevitable moderation in export growth in 2H. Not all hope is lost however, especially since the unemployment rate dropped to the lowest point since 2019. Nevertheless, if domestic demand does not strengthen more notably in the coming months, the increasingly likely scenario is that the PBoC will get no window to hike at all. This is especially the case given that the total social financing data from April showed that China’s credit impulse dropped sharply once again–and turned negative.