Founder of Antler Capital

Stanley Tsai, CFA

Macroeconomics

China's inflation moderated in June, but there was still a significant gap between the PPI and CPI. This has prompted the central bank to ease earlier than the market expected, in a bid to shore up small businesses that have suffered from a margin squeeze amid relatively weak consumer demand.
The PPI has come off its peak, as we anticipated last month. However, the differentials between resource extraction, materials and processing PPIs remained uncomfortably wide. Factory gate prices for coal and ferrous metals continued to accelerate, while midstream price volatilities were less pronounced. Downstream sectors saw a much more benign environment, with the exception of metal products.
The CPI was a touch lower than our expectation. Lower pork prices drove the food CPI basket back into negative territory. In contrast, non-food CPI's upward trend gained further traction, as prices begin to normalize from a low base. 
Looking ahead, we expect the gap between the PPI and CPI to narrow. From a record high of 7.7%, the spread will likely start to mean-revert as commodities prices soften and consumer demand strengthens towards the end of the year.
We would watch pork prices closely in the coming months. The NDRC's recent intervention in the pork market may have been a symbolic gesture, but we believe conditions are ripe for a recovery in live hog prices. If they overshoot the CNY18-20/kg level in the near term, CPI may rise faster than what the market would like to see.
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<td style="width: 100%;">Exhibit 1: PPI and CPI (%)</td>
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<td style="width: 100%;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/217/755/original/image_12185335121625973064817.png?1625973065" class="editor-image img-responsive" data-smartkarma-image-id="217755"></figure>
Source: National Bureau of Statistics, Our analysis
</td>
</tr>
</tbody>
</table>
Related Insights
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<li><a href="https://www.smartkarma.com/insights/pork-price-rebound-what-it-means-for-china-s-inflation" target="_blank" data-smartkarma-citation="insights:54187" rel="noopener">Pork Price Rebound: What It Means for China's Inflation</a></li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-profits-flowing-gently-down-the-stream" target="_blank" data-smartkarma-citation="insights:53726" rel="noopener">China Macro: Profits Flowing Gently Down the Stream</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-ppi-peaks-while-cpi-eases-tightening-fears" target="_blank" data-smartkarma-citation="insights:52778" rel="noopener">China Macro: PPI Peaks, while CPI Eases Tightening Fears</a> </li>
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<a href="https://www.smartkarma.com/insights/china-financials-silver-linings-playbook" target="_blank" data-smartkarma-citation="insights:53013" rel="noopener">China Financials: Silver Linings Playbook</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-consumers-remain-on-the-sidelines-as-their-home-equity-grows" target="_blank" data-smartkarma-citation="insights:53210" rel="noopener">China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows</a> </li>
</ul>

China's inflation moderated in June, but there was still a significant gap between the PPI and CPI. This has prompted the central bank to ease earlier than the market expected, in a bid to shore up small businesses that have suffered from a margin squeeze amid relatively weak consumer demand.
The PPI has come off its peak, as we anticipated last month. However, the differentials between resource extraction, materials and processing PPIs remained uncomfortably wide. Factory gate prices for coal and ferrous metals continued to accelerate, while midstream price volatilities were less pronounced. Downstream sectors saw a much more benign environment, with the exception of metal products.
The CPI was a touch lower than our expectation. Lower pork prices drove the food CPI basket back into negative territory. In contrast, non-food CPI's upward trend gained further traction, as prices begin to normalize from a low base. 
Looking ahead, we expect the gap between the PPI and CPI to narrow. From a record high of 7.7%, the spread will likely start to mean-revert as commodities prices soften and consumer demand strengthens towards the end of the year.
We would watch pork prices closely in the coming months. The NDRC's recent intervention in the pork market may have been a symbolic gesture, but we believe conditions are ripe for a recovery in live hog prices. If they overshoot the CNY18-20/kg level in the near term, CPI may rise faster than what the market would like to see.



Exhibit 1: PPI and CPI (%)




Source: National Bureau of Statistics, Our analysis




Related Insights

Pork Price Rebound: What It Means for China's Inflation

China Macro: Profits Flowing Gently Down the Stream 

China Macro: PPI Peaks, while CPI Eases Tightening Fears 

China Financials: Silver Linings Playbook 

China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows 


China Macro: PPI and CPI Have Reached Inflection Points

Asia L/S Equity PM/Macro/Thematic Idea Generation

Rikki Malik

<ul>
<li>Qingming holiday sending surpasses  2019 levels on an absolute and per capita basis</li>
<li>A further relaxation of housing measures spurs increased mortgage demand</li>
<li>Two steps forward, one step back -typical signs of a bottoming-out economy.</li>
</ul>


Qingming holiday sending surpasses  2019 levels on an absolute and per capita basis
A further relaxation of housing measures spurs increased mortgage demand
Two steps forward, one step back -typical signs of a bottoming-out economy.


Chinese Data Continues to Improve Incrementally

Thematic (Sector/Industry)

<ul>
<li>China’s economic data is continuing to surprise on the upside.</li>
<li>Investors are starting to take notice and good news is not being ignored – a sign of a change in sentiment.</li>
<li>Economically sensitive and commodity-related sectors a good hunting ground for absolute returns</li>
</ul>


China’s economic data is continuing to surprise on the upside.
Investors are starting to take notice and good news is not being ignored – a sign of a change in sentiment.
Economically sensitive and commodity-related sectors a good hunting ground for absolute returns


What's up with Hong Kong? Bull Market Dude!

Cross-Asset Liquidity Strategist, CrossBorder Capital

Michael J. Howell

Cross-Asset Liquidity Strategist

Implementing Research Using Alt Data & AI

CrossBorder Capital

CrossBorder Capital is a London-based independent investment advisory firm. Founded in 1996, it exploits a gap in the investment arena by focusing on Central bank liquidity. 

It specialises in the monitoring and analysis of global liquidity flows - an important determinant of asset prices, from currencies through to bonds, equities and real estate.

CrossBorder Capital implements its investment strategy and currently manages over US$ 350m.


Cross Asset Strategy

<ul>
<li>
 China’s economy is not anything like as ‘bad’ as being reported by the popular media. Yet, there are deep structural challenges which will hinder future economic growth</li>
<li>Monetary policy makers have recently been constrained by the weak Yuan (CNY)
</li>
<li>
 Liquidity is now being re-injected aggressively. More liquidity boosts economic activity. The cost could be a CNY of RMB8/ US$</li>
</ul>



 China’s economy is not anything like as ‘bad’ as being reported by the popular media. Yet, there are deep structural challenges which will hinder future economic growth
Monetary policy makers have recently been constrained by the weak Yuan (CNY)


 Liquidity is now being re-injected aggressively. More liquidity boosts economic activity. The cost could be a CNY of RMB8/ US$


China Is Adding to World Liquidity, But At A Cost…

<ul>
<li>
 EM Liquidity remains low but again pushed higher in November and looks set to rebound strongly in 2023, helped easier Chinese monetary conditions 
</li>
<li>
 World economy skidding badly and probably already in recession. EM investor positioning data already discounts much of this drop. Capital outflows becoming far less negative.</li>
<li>
 Weaker US dollar likely to add support to EM, gold and commodities in 2023. Many commodity-rich EMs look attractive.</li>
</ul>



 EM Liquidity remains low but again pushed higher in November and looks set to rebound strongly in 2023, helped easier Chinese monetary conditions 


 World economy skidding badly and probably already in recession. EM investor positioning data already discounts much of this drop. Capital outflows becoming far less negative.

 Weaker US dollar likely to add support to EM, gold and commodities in 2023. Many commodity-rich EMs look attractive.


Emerging Markets Could Outperform in 2023?

China

The Shanghai Stock Exchange Composite Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The index was developed on December 19, 1990 with a base value of 100. 

Shanghai Stock Exchange Composite Index (SHCOMP INDEX)

Shanghai Stock Exchange Composite Index (SHCOMP INDEX)

China Macro: PPI and CPI Have Reached Inflection Points

The spread between China’s PPI and CPI will likely begin to mean-revert, following a steep rise over the past 12 months. The shape of this...

Stanley Tsai, CFA

Chinese Data Continues to Improve Incrementally

Chinese consumer confidence rising as Qingming holiday spending surpasses 2019 levels, and increased mortgage demand seen due to housing measures...

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What's up with Hong Kong? Bull Market Dude!

China's stronger economic data is catching investors' attention, signalling a shift in sentiment and highlighting opportunities in economically...

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China Is Adding to World Liquidity, But At A Cost…

Chinese policy makers have recently been constrained by the weak Yuan. Liquidity is now being re-injected aggressively. More liquidity boosts...

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Emerging Markets Could Outperform in 2023?

EM Liquidity looks set to rebound strongly in 2023, helped easier Chinese monetary conditions Weaker US dollar likely to add support to EM, gold...

Michael J. Howell

China Macro: PPI and CPI Have Reached Inflection Points

The spread between China’s PPI and CPI will likely begin to mean-revert, following a steep rise over the past 12 months. The shape of this...

Stanley Tsai, CFA

Chinese Data Continues to Improve Incrementally

Chinese consumer confidence rising as ​Qingming holiday spending surpasses 2019 levels, and increased mortgage demand seen due to housing measures...

Rikki Malik

What's up with Hong Kong? Bull Market Dude!

​China's stronger economic data is catching investors' attention, signalling a shift in sentiment and highlighting opportunities in economically...

Rikki Malik

China Is Adding to World Liquidity, But At A Cost…

Chinese policy makers have recently been constrained by the weak Yuan. Liquidity is now being re-injected aggressively. More liquidity boosts...

Michael J. Howell

Emerging Markets Could Outperform in 2023?

EM Liquidity looks set to rebound strongly in 2023, helped easier Chinese monetary conditions Weaker US dollar likely to add support to EM, gold...

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Chinese consumer confidence rising as Qingming holiday spending surpasses 2019 levels, and increased mortgage demand seen due to housing measures...

China's stronger economic data is catching investors' attention, signalling a shift in sentiment and highlighting opportunities in economically...