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China’s CPI turns negative and the way out of China’s economic dangers | He Jiangbing

蘋果日報 2020/12/15 09:54


The National Bureau of Statistics (NBS) of China released November data on Dec 9th, showing that the consumer price index (CPI) fell 0.5% year-on-year (YoY), the first negative value in 11 years, and the producer price index (PPI) also fell 1.5% YoY. The media and financial professionals referred to this as a “double deflation.” This statement is completely wrong as the speed of currency issuance has exceeded that of previous years, while the CPI itself has its own particular and structural problems. A decline in the CPI is very rare for China, and the situation is entirely different from 2009. The U.S. subprime mortgage crisis 11 years ago had an impact on the global economy, especially on China’s exports, resulting in a multinational financial crisis during which prices plummeted. At present, China just ended a quarter affected by the epidemic with the strongest growth among major economies. Institutions generally believe that China’s gross domestic product (GDP) growth will be 2% this year and 8% next year. There are special reasons for this round of CPI to turn negative.
First, it is normal for long-term increases to occasionally turn negative, but it is unique when they occur in a high growth economy. Economic growth will result in lower unemployment and higher prices. In November, China’s manufacturing purchasing managers index (PMI) was 52.1%, while the non-manufacturing business activities index was 56.4%. The composite PMI output index was 55.7%.
The second is for structural reasons. The decline in China’s pork prices is a key factor in the CPI turning negative. Food has one of the highest weights in China’s CPI basket with pork as the main driver of food prices and the single-largest item shaping the overall CPI. Pork prices continued the downward trend last month, down 12.5% YoY, affecting the CPI drop by about 0.60%.
Third, people have low income, the country is undergoing consumption downgrade and the lengthening of the lifespan of durable goods. With nearly one billion people earning less than 2,000 yuan (US$306) a month, it is almost impossible to expect consumption upgrade. On the contrary, consumption downgrade has become the norm. At the same time, most people extend the lifespan of durable goods. A total of 29.584 million mobile handsets were shipped domestically in China in November 2020, down 15.1% YoY, according to figures released on Dec 10th by the China Academy of Information and Communication Technology (CAICT). In the 11-month period from January to November in 2020, a total of 281 million mobile handsets were shipped domestically, down 21.5% YoY. Both shipment and sales volume have dropped significantly.
The fourth reason is the stockpiling of food and other goods earlier. During the epidemic and flood, various hype around the so-called food shortage at home and abroad led to the hoarding of food and other commodities.
The fifth is the epidemic factor. Since November, the pandemic has rebounded in various parts of the world, and occasionally in some cities in China, resulting in a decrease in outdoor activities such as dining, entertainment, travel, and shopping. This is also a rather special phenomenon.
Eleven years ago, when export-oriented enterprises in Jiangsu, Zhejiang and Guangdong were badly hit and the Chinese economy was in decline, the authorities launched a four trillion yuan stimulus policy. Many of the current infrastructures such as high-speed rail, airports and urban railroads are still products of that time. Now, similar stimulus programs are hard to come by and many infrastructure capacities have reached saturation or even surplus. The most important thing is that China was deep in the economic downturn at that time, and now it is completely out of the predicament from a quarter of production shutdown, and the way out of the crisis in the current round is with enterprises and personal debt. One measure is copied from the last round of crisis management model: the Ministry of Commerce is again promoting home appliance and vehicle purchasing in rural areas and trading in used cars for new ones to help boost consumption.
Although it is widely believed that the Chinese economy will have high growth next year, there are many hidden dangers in China’s economy. For example, due to chip shortages, automakers including SAIC Volkswagen and FAW-Volkswagen have started to stop production in December.
Affected by factors such as the Sino-U.S. trade war, rising labor costs in China and high tariffs, the relocation of foreign companies to Southeast Asia and India has had a difficult to reverse impact on China’s global factory industrial chain. The U.S. House of Representatives and Senate have passed a series of bills, and the decoupling of U.S. and Chinese trade and finance will proceed in an orderly manner. For example, the U.S. House of Representatives recently unanimously passed a bill that requires Chinese companies to meet U.S. listing requirements and adhere to U.S. auditing standards. In addition to Chinese aviation, aerospace and nuclear power equipment companies, the U.S. government has also blacklisted China’s largest chip manufacturer Semiconductor Manufacturing International Corp. (SMIC). The expansion of the U.S. sanctions will further hinder China’s industrial chain.
As the relationship between China and the U.S. worsens, it will eventually be reflected in enterprises and industries. The fundamental solution to the long-term hidden dangers of the Chinese economy lies in improving Sino-U.S. relations and lowering tariffs. Both enterprises and ordinary people are powerless to do anything about it.
(He Jiangbing is a Chinese financial commentator.)
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