Letter From Shanghai No 1042 - Solidly Expansionary

Later today, we get Germany’s inflation rate (expected 9.1%), tomorrow we get China’s (expected 2.0%), and on Tuesday, we get the US rate (expected 6.3%).

Clearly, China is the outlier, as domestic inflation is below the official target of 3%, a fact that only underlines the current dearth of demand drivers in the Chinese economy. But then again, Chinese policy rates are 3.65%, yielding a positive real interest rate of 1.65%. Cutting rates significantly has never been on the table in China. Chinese policy rates were 4.25% in 2016, and they have gently fallen 60 bps in the last 7 years.

Of course, regarding policy, China has a completely different starting point. Very simplistically, the Fed are the unrepentant monetarists who like to cut rates to fire up demand, whereas the staunchly Keynesian Chinese like to borrow and build their way out of recession. For the Chinese, interest rate intervention is too generalist, lacks regional focus, and is too blunt a tool as the Chinese try to raise the living standards in the poorest regions. Building is specific, which makes the current malaise in the housing industry, perhaps 40% of GDP, all the more painful.

But perhaps there are larger forces at work. If we assume China’s population is declining, then looking forward, perhaps the house-building industry should be smaller. China only needs the rotation of older homes for new ones. Certainly, the absence of Beijing’s direct intervention in the housing market indicates Beijing would like to see some development companies consolidate or expire, but preferably only after they have delivered their currently contracted sales to buyers.

This morning’s domestic media commentary is comfortably bullish. It appears travel data and the number of road, rail and air journeys is holding up after the new year peak. The lending data, New Yuan Loans, Total Social Financing, Loan Growth, etc., are due as of tomorrow and may appear over the weekend, but the expectation is solidly expansionary. For example, New Loans are expected to have swollen from RMB 1400Bn in December to an expected RMB 4000Bn in January.

Have a good day,

?

John