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ChartBrief #23 China PPI Inflation

October 14, 2016

That's right, you didn't misread the title, China is now experiencing (Producer Price Index) PPI *inflation* after going through over 4 years of PPI *deflation*.  The September reading was +0.1% YoY (vs expectations of -0.4% and previous reading of -0.8%).  There's a couple of really important charts on China and its PPI I wanted to show updates of below, so this article will mostly let the charts do the talking...

 

1. The surprising thing

The surprising thing about the turnaround in Chinese PPI from deflation to inflation is the fact that it has taken most by surprise. The monthly readings of PPI have almost consistently exceeded expectations, and by order of magnitude of around 30bps.  This goes to show that people have been to negative on China and probably remain too negative on China - that creates scope for upside surprise...

 

2. Why did PPI turnaround?

While you can point to a number of possible culprits for the turnaround in Chinese producers prices such as the rebound in commodity prices and the weakening of the Chinese Yuan, another key driver - as the graph below shows - is the boom in property prices in China.  The conscious reflating of the property bubble in China (interest rate cuts, mortgage rule easing, sales tax cuts, removal of purchase restrictions, hukou registration easing) has seen property prices surge - and in the past that has usually lead to a rise in producer price inflation, as we are now seeing.

 

3. One reason why Chinese PPI matters

While there are a couple of other reasons why China's PPI is of interest, a key one for investors is the apparent relationship between Chinese PPI and emerging market equities.  Emerging market equities tend to do well when China is seeing a rise in producer prices, so the improving trend in China's PPI is one thing that could give the emerging market equity rally room to run.

 

Bottom line: China has seen a turnaround from PPI deflation to PPI inflation, partly driven by the reflation of the property bubble; this may be supportive for emerging market equities.

 

 

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