China Stocks Surge, But CPI Data to Show the Economy Remains Weak
China Stocks Surge, But CPI Data to Show the Economy Remains Weak
By:Ilya Spivak
China propping up its stock market, but inflation data due this week is set to show the underlying economy remains anemic
- Chinese stocks are surging as Beijing scrambles to prop up prices with official buying.
- Deflation in China is expected to deepen in January, pointing to anemic demand.
- Soft CPI inflation data may revive global recession fears across financial markets.
China’s stock market has come back to life in explosive fashion. The catch-all CSI 300 index containing the leading names listed on China’s key exchanges in Shanghai and Shenzhen is on pace to rise over 5% this week, marking the biggest rally in 16 months. The popular iShares China Large-Cap ETF (FXI) has jumped to a five-week high.
Trading activity on China’s exchanges is swelling in tandem. The Financial Times estimates daily turnover jumped to a five-month high this week. This follows a flurry of activity suggesting the authorities in Beijing are stepping up efforts to arrest what has been a dramatic slide in local markets. The CSI 300 shed nearly 30% last year.
Central Huijin, the investment unit of China Investment Corp, the country’s sovereign wealth fund, said it plans to expand purchases of locally listed exchange-traded funds (ETFs). Then, official media outlets reported China Securities Regulatory Commission chair Yi Huiman was removed from his post, as if to signal regime change.
China’s stock market vs. economy: contrasts galore
The key question now is whether such firefighting will amount to anything more than stock market cosmetics, while the underlying economy continues to suffer. Data due this week is set to show demand remains woefully anemic. The consumer price index (CPI) is expected to show deflation deepened in January, printing -0.5% year-on-year.
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China boosters have argued that such outcomes are less ominous than they appear, owing mainly to falling food and energy prices on global markets. Indeed, core prices excluding the two categories rose 0.6% year-on-year for a third consecutive month in December. This measure hasn’t seen a negative reading in over two years.
China and global recession risk: reasons to worry
While food and energy are certainly large components of China’s CPI basket and price declines there are undoubtedly a global phenomenon, the economy-wide story is worrying all the same. Real gross domestic product (GDP) growth has outpaced the nominal side for three quarters straight, implying an eye-watering deflationary gap of about 1.5%.
Chinese economic data outcomes have deteriorated relative to forecasts in the past three months, suggesting analysts’ models are overestimating the battered economy’s attempt at recovery. This warns that surprise risk is tilted on the downside. A disappointment may revive concerns about global recession, weighing on stock markets.
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Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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