James Lewis

China: CPI Surprisingly Low, Trade Surplus High

The Chinese numbers differ in that they are manipulated at a lot of different levels.

Firstly at ground level, incorrect numbers are given for the obvious reason that there are price controls, so sellers have to under estimate the figures somewhat.

Then they are manipulated using the basket weight, as well as a final 'audit' on the numbers by the statistics bureau. If the pro-growth camp currently holds influence over the stats bureau then they will be played with to represent their aims. However at the moment I believe the manipulation is coming from a lot lot higher in an attempt to:

a) give positive messages to market.
b) give positive message to foreign investors to control capital outflows.
c) stem inflation expectations so there are no 3rd round effects. (we have already had second round effects)

I must say that vegetable oil has come down a rediculous amount recently. And so fast. Of course oil has fallen, but it usually takes a lot longer to see the prices come into the actual market place (ie supermarket). Also the price has fallen a lot more than it should. It as if they have passed on the savings (plus some) instantly. Looks pretty obvious to me that the prices have been driven down (with implicit instruction from the government ) . This would effect the CPI to create positive number, But far far more importantly it is an attempt to communicate to the public prices are coming down to displace price fears/expectations (the Chinese are very sensitive to issues like this, more than the westerners). By displacing price fears they are hoping to give consumer spending a boost and improve the gloomy sentiment that a lot of people are feeling. Reducing the price of cooking oil (and of course pork) is a very effective to communicate price reductions. The Chinese watch very closely the price of cooking oil, it is a product that everyone buys and the Chinese attach a huge huge amount of significance to cooking oil. In old times, cooking with oil was a symbol of wealth. Having oil on your clothes signified that you ate good food.
So going into Mid Autumn festival, the appearance of reduced cooking oil and pork is quite a good way to show inflation is under control. It has been very effective, people are already talking about it.

The price controls have contributed to the widening cpi/ppi differential. But to a large extent the differential is due to the factories not feeling they are able to pass on the increase in costs to consumers. On a great deal of products they have planned many many times over the last 4-5 months to increase their prices, at the last stage deciding not to on the basis that everyone is reining in their spending. Things are now quite tight here. If bargins is not to be had, people as a whole just won't buy. My personal experience is that it is far easier to negotiate a far lower price than it has been for at least a year and a half. Of course they are also handcuffed because of the huge overcapacity that is present in China. There are so many factories supplying similar products that there is no scope to raise prices because of the choice consumers have (non-food,non-energy). There will always be a factory that doesn't increase their prices and as a result they will gain amrket share. Businesses are in survival mode, revenue and cashflow is trumping margins. Theoretically if international markets slow then there will also be an inventory build up that the factories will then try and channel to the domestic market. Making price increases impossible regardless of PPI inflation.

In fact I think it is fair to say that China runs the risk on certain components of the economy of deflation. We have seen huge stock market deflation already, the first hand property market is under stress in most cities and has fallen in some cities. Now it could be funneling into consumer goods. I question whether we have reached such an extreme of investment that any tail off in monetary growth (however small) may lead us into a temporary cycle of deflation.