The price statistics for the month of November in China have cast yet another dark shadow on the Chinese economy which is currently facing downward pressure.
According to the statistics released by the National Bureau of Statistics of China on December 10, the consumer price index (CPI) in November 2019 rose 4.5% YoY. Among them, the CPI of cities rose 4.2%, while rural areas rose 5.5%. Food prices rose 19.1% and non-food prices rose 1.0%. Lastly, consumer prices rose 6.5%, while service prices rose 1.2%. On average from January to November, the CPI rose by 2.8% over the same period last year.
In contrast to the significant rise in CPI, the industrial producer’s price index (PPI) is still trending downwards. In November 2019, the purchaser price nationwide fell by 1.4% YoY, with the producer price falling by 2.2% YoY. On average from January to November, the purchaser price fell by 0.3% year-on-year, and the producer price fell by 0.7%.
What do we know from this latest price index? What changes can be seen in China's economy? This is probably a matter of great concern to the market at the end of the year. According to the macro team of ANBOUND, as the CPI in November rose 4.5% YoY, such a price increase is the highest monthly growth rate since January 2012 (4.5%), and should be something that the relevant parties should take notice of. In recent months, domestic prices have risen strongly. From August to the present, CPI has risen by 2.8%, 3.0%, 3.8% to 4.5% YoY which was a substantial increase. Based on this momentum, and due to the possible influence of Chinese New Year in January next year, the CPI might very well exceed 5%.
Does this indicate that China is ushering an era of high inflation? Judging from the sharp rise in the price index, one certainly needs to be alert of the surge in inflation. If inflation is encountered against the background of declining economic growth, China will technically fall into "stagflation". This means that an economic downturn and rising inflation will be a major issue for the Chinese economy. As the downward pressure on the economy may directly lead to an increase in the number of unemployment and a slowdown or even decrease in income growth, stagflation will have a very realistic impact on the lives of ordinary people at the social level, and it will further reduce the consumer demand of the people and exacerbate the "winter" effect of the economy.
However, the structure of price increase shows that the sharp rise in price indices is mainly due to increasing food prices, particularly the rise in pork prices. Data from the National Bureau of Statistics shows that in November, the prices of food, tobacco and alcohol increased by 13.9% YoY, which affected the CPI by about 4.10 percentage points. Among the different types of food, the price of meat increased by 74.5%, which affected the CPI by approximately 3.27 percentage points, of which the price of pork increased by 110.2%, in turn affecting the CPI by approximately 2.64 percentage points. This means that if the price of pork is excluded, the CPI rises to 1.86%. The price of CPI would rise to 1.23% excluding meat, and the CPI other than tobacco, alcohol and other food will rise to about 0.4%. Obviously, the "structural factors" of this round of price increases have a great impact, where we see the aftereffects of the bout of African swine fever that have directly pushed up prices.
Changes in industrial prices show the other side of China's economy. Producer prices and purchaser prices continued to fall year-on-year in November, indicating that China's industrial economy is still in the doldrums. It is worth noting that the PPI decline, although somewhat moderated, is increasingly distinct from the CPI surge. In addition, the prices of domestic services are also falling. In November, the prices of other supplies and services, education, culture and entertainment fell by 0.8% and 0.7% respectively, while prices for transportation and communications and household goods and services fell 0.3% and 0.1%, respectively.
On the whole, the rise in pork prices has pushed up food prices, resulting in a structural rise in domestic inflation. At the same time, China's industrial economy and service sector remain relatively depressed. Downward pressure on the economy and a rise in structural inflation has collectively led to an increasingly pronounced "atypical stagflation" in the Chinese economy. In the future, whether rising prices will spread to other areas and eventually turn into overall inflation depends on the changes in the economic situation and the response of macro policies. But overall, our view that the Chinese economy is showing signs of recession remains unchanged.
It should be pointed out that the presence of an atypical stagflation poses a challenge to macroeconomic policy adjustment. Yi Gang, the Governor of the People's Bank of China, has previously said in an analysis of the central bank's monetary policy that inflation targets ranging from 1% to 4% might be a reasonable range for central banks worldwide to target based on their own national conditions. This statement implies that the Chinese central bank's target range for future inflation could be capped at 4%. Inflation is now more than 4%, but downward pressure on China's economy calls for continued monetary easing. How therefore should macro policies be balanced in the future? This is a thorny issue for both the central bank and the State Council.
Final analysis conclusion:
China's economy is entering a state of "atypical stagflation" while at the same time showing increasing signs of recession. In the background of all this, it’s likely that China's economy in 2020 will start from a "severe winter" of sorts.
