No Lifeboat From China This Time Around

China’s consumer prices rose 2.2% in June from the year before, according to data published yesterday. That rate is a 29-month low. More importantly, it has some people excited that China’s authorities have free reign to promote growth through more stimulus. They can spend, spend, spend without fear of igniting socially destabilising inflation in consumer prices.

Producer price data was also released yesterday. Producer prices fell for the fourth month in a row in China. The index was down 2.1%. ‘A full-fledged deflationary cycle has not started yet but you can see it in more and more industrial sectors. That’s a signal that it is spreading,’ economist Ren Xianfang told the Financial Times.

As we said at our China conference in March, ‘The deflation is NOW.’ Stock and commodity prices would be falling much further (and much faster) without the rate cutting and money printing at the central bank level. Easy monetary policy has acted like a brake on falling asset prices. But with stock markets failing to respond to rate cutting measures last week, some stronger, more unconventional policy may be required to keep asset prices high.

By the way, ignore the CPI numbers anywhere and everywhere you find them. None of the money fabricated by various QE efforts has leaked into consumer prices. It’s all being used as balance sheet ballast to keep banks from sinking. The exception may be China, where the 2009 stimulus money went straight into fixed asset investment and real estate speculation, which did drive real commodity prices up (like iron ore and coal).

Greg Canavan makes exactly this point in his China Bust report. If you look at Australian commodity prices and the terms of trade, both had peaked and were headed down in 2009. China’s intervention staved off an even .sharper correction. Greg doesn’t reckon the Chinese have the ‘policy flexibility’ to save Australia again. You’ll have to save yourself, dear reader.


Dan Denning
for Markets and Money

From the Archives…

How to Survive Inside China’s Financial System
06-07-2012 – Greg Canavan

China’s Economic Policy of Denial
05-07-2012 – Greg Canavan

The Question China Has To Answer Fast to Save Its Economy
04-07-2012 – Callum Newman

How Investing in Commodities Can Prevent a Personal Financial Crisis
03-07-2012 – Dan Denning

Wouldn’t it Be Nice to Not Lose Money on the Australian Share Market?
02-07-2012 – Dan Denning

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

Leave a Reply

2 Comments on "No Lifeboat From China This Time Around"

Notify of
Sort by:   newest | oldest | most voted
My contention is that China has tried cool home prices in the places where they became too high after a massive monetary inflation post GFC. The anomaly is a product of central planning/command economy no doubt and no argument there. Maybe though not a mortgage credit/gov. policy driven bubble comparable with Australia’s. China had very high wage inflation not too long ago. Does Australia? Chinese apparently like to save in terms of houses and it’s possible they are not too interested in selling them off. Wen is also saying the government will create many low cost new homes to ease… Read more »
Gary Lee
Do you know what the mainland Chinese thinking and doing? their people work very hard for the past 20-30 years since the country open to the west. In exchange they have to hold so many US bond (debt) that USA simply won’t or can’t repaid to keep the RMB down, they borrow the money from world bank with the US bond (debt) as security. Using these loaned money to buy gold and build asset, roads, building, city and all the infrastructure for the country. They also buy as many resource from everywhere in the world at any cost and sit… Read more »
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to