China’s market was shocked by a new threat, deflation. After the PPI announcement on December 9, China’s A Shares opened lower.
PPI rose 2 % from a year earlier in November, the lowest increase since 2.2 per cent in January 2007, decelerating sharply from 6.6% in October and the lowest rise since April 2006. The Data signaling the economy may be headed toward deflation.
According to Ma Qing, an analyst with research firm CEB Monitor Group in Beijing, inflation in China would likely be negative 1.5 per cent in the coming months, while HSBC chief China economist Qu Hongbin yesterday reversed his forecast for China's CPI outlook next year to a decline of 0.2 per cent from a 2.5 per cent increase.
China's growth is expected by the World Bank to slide in 2009 to 7.5 percent, below a level of 8 percent widely regarded as the minimum needed to absorb millions of people entering the work force each year. It expanded 11.9 percent in 2007.
Chinese Academy of Social Sciences released a report entitled, “Economic Blue Book”, on December 2. In the report, it predicted that China would maintain its GDP growth at 9% in 2009 and CPI will continue down 4% at the same time that China's exports in October before the actual growth rate fell sharply; exports contribution to the GDP growth will drop.
Wang Tongsan of Chinese Academy of Social Sciences said that the Chinese economy is an existence of the possibility of deflation, but very small, should be around 3%. It can not completely rule out the possibility of deflation, but very small. Because of two factors:
- China’s proactive fiscal policy and moderate monetary policy, such a policy is certainly the direction of prices.
- A factor in the long run, it is necessary to straighten out the pricing mechanism, in particular some of the resources of public goods and the value of the mechanism of administrative factors.
As a matter of major macro-control policies, resources and product pricing mechanism for the formation, in 2009 there was an increase of the price, do not rule out the possibility of deflation.
Wang Tongsan said on stagflation, if it is defined as high inflation and economic recession, negative growth, China is no possibility. Now as China's CPI showed a downward trend, CPI has reached 4%, so there is no inflation. With regard to lag, even as China's economy is now the most pessimistic forecast is 7%, 6% had not. If such a situation, this is also a relatively low growth rate. So, I think, be it a strict definition of stagflation, or the other, China will not appear stagflation.
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Bespoke:
As recently as August, PPI data from China showed that inflation was running at a rate of 10.1% year over year (y/y). Since then, however, pricing power in China has collapsed as evidenced by last night's release of the November PPI, which showed that prices are now up by just 2.0% y/y. At this rate, it won't be long before we start seeing minus signs.
China is no stranger to deflation; consumer prices fell 0.8 percent in 2002, 1.4 percent in 1999 and 0.8 percent in 1998. But more is at stake for the money market this time. The rapid growth of the banking system, reforms like the introduction of interest rate derivatives and rising debt issuance have lifted trading volume in the interbank bond repurchase market more than fivefold since 2002. Bill market trading over the past month suggests that banks have actively started preparing for the possibility of deflation.
China didn't resort to zero rates during its previous periods of deflation, and after the announcement this month of a nearly $600 billion economic stimulus package for the next two years, it is clearly counting on fiscal policy to support growth.
The commercial banks' benchmark one-year deposit rate is now at 3.60 percent. A cut to 1.98 percent, the low end of a forecast from the Bank of China for the end of 2009, would bring it down to its level in 2002, when China last experienced deflation.
ETFs/Stocks :iShares FTSE/Xinhua China 25 ETF FXI $31.24
ProShares UltraSh FTSE/Xinhua China 25 FXP $32.73
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Sources :- News.cn: Academy of Social Sciences forecast: GDP growth in 2009 China will continue to 9% CPI down, December 2, 2008 16:58:25
- Reuters: WRAPUP 1-Deflation risks in China, Japan as demand slumps, December 10, 2008 5:01 am EST
- The Australian Business with WSJ: China's deflation fears increase as CPI pace slows, December 11, 2008
- The International Herald Tribune: Deflation looms as new threat to China, November 20, 2008
- CNBC: China A-shares end morning lower after PPI data; airlines, banks up - UPDATE, December 9, 2008
- CNBC: China Nov PPI up 2 pct year-on-year; steep drop from October rise UPDATE 2, December 9, 2008
- Bespoke: Deflation Coming in China?, December 10, 2008 at 03:07 PM
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