Chinese Premier Li Keqiang urged officials to use fiscal and monetary policies to stabilize employment and the economy as the country reels from Covid outbreaks and rising inflationary pressure.
The official line coming out of Covid-hit Shanghai is that business is returning to usual despite the ongoing lockdown, yet hundreds of manufacturers in the city aren’t operating at anywhere near to full capacity, if they’re up and running again at all.
While factories have been given special allowances to reopen under strict guidelines and systems, snarls in the supply chain — from a shortage of delivery drivers to a lack of materials — continue to disrupt local operators and global giants including Tesla Inc. and Sony Group Corp. And despite a decline in virus cases, the lockdown is intensifying as officials chase the elusive goal of wiping out Covid in the community.
“Restrictions on transport of people and goods remain a serious problem,” said Louis Kuijs, Asia Pacific chief economist at S&P Global Ratings. “Much more needs to happen before we can start talking about a return to normality.”
And policymakers are still fiddling. Goldman:
China’s economy has slowed significantly in recent months on a fading export tailwind, property sector weakness, and Covid lockdowns. Macro policy has eased, though less aggressively than we and most others had anticipated. We leverage our past work estimating a “domestic macro policy proxy” for China to gauge whether policymakers’ reaction function has shifted.
A simple “Taylor-type” policy rule incorporating output gap and headline CPI inflation does a reasonable job of explaining the 2008 and 2020 easing cycles, but much less well at explaining the 2014-15 easing cycle (in part because high-profile measures of growth did not show much slowing then). This simple two-term rule suggests China’s current policy stance is broadly in line with output and inflation conditions, after being unusually tight at times in 2021. However, taking into account the current very weak trajectory of economic activity, policy will soon look “too tight” again relative to macro conditions if growth does not recover quickly.
Output and inflation are not the only factors driving China’s policy stance. China’spolicymakers have eased fairly consistently in response to financial stress in the past, as well as to greater uncertainty in the outlook. They also respond to global policy and financial conditions—e.g. higher US rates tend to be associated with tighter China macro policy even after controlling for growth and inflation in China.
Our analysis is consistent with statements China’s policymakers have madeabout constraints on easing in the current instance. This includes concerns about the capital flow implications of looser (monetary) policy amid higher global ratesand tighter global financial conditions, as well as ongoing Covid restrictions—which both inhibit the effectiveness of policy stimulus and could provide an impetus for recovery if lifted.
Sure, but the problem remains this:
Can there be a recovery of substance when so much of China is in semi-permanent partial lockdown?
Combine this with the blockages for fiscal transmission in weak land sales and my answer remains no.
So, I am not concerned about any Chinese inflation breakout:
Food and energy underpin a greater-than-expected jump in consumer inflation
Currency weakness, and stress in global commodity markets, were the main drivers of the large increase in Chinese consumer price inflation for April. Food inflation surged to 1.9% y/y in April, from -1.5% in March, despite continued pork deflation, thanks to higher grain and vegetable prices. Energy inflation is not reported, but we estimate it rose to 34.3% y/y, from 31.7%, despite a pullback in global crude prices in April. Services inflation, however, slowed to 0.8% y/y, from 1.1% in March, and core inflation dipped to 0.9%, from 1.1%, as zero-Covid restrictions bit into domestic demand.
Inflationary pressure from higher global commodity prices has been exacerbated by the recent fall in the renminbi, which weakened against the dollar by around 4% over the month. We expect this to contribute to continued elevated food and energy prices in May, even as zero-Covid continues to drag on core inflation. We remain of the view that inflation – still well below its 3% target – is not a meaningful constraint on PBoC action. Policy will remain more focused on the deleterious position of growth – hinted at by slowing core inflation – and the plunge in the currency.
PPI disinflation slowed in April
Currency and commodity price effects meant that most PPI subcomponents – mining, raw materials, and consumer goods – actually saw an increase in April, with only manufacturing PPI slowing, to 4.8% y/y, from 5.7%. This was enough, however, to bring overall PPI inflation down, though the second derivative is falling. Again, there is evidence here of the conflicting inflationary drivers: higher imported prices for food and energy, offset by falling demand. Consumer durables inflation turned negative in April, while food PPI doubled to 1.6% from 0.8%. Producer purchasing prices, meanwhile, rose slightly in April, to 10.8% y/y from 10.7%, the first increase since November, thanks chiefly to higher energy costs. Base effects, however, should still see PPI head lower over the course of the year.
Our first chart shows the key official components of CPI inflation. Our second chart shows the split of PPI between industrial and consumer goods.
Expect more easing and more CNY weakness to blow up the world.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
