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.
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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