Chinese prices are falling, raising the prospect of deflation and at the same time, the country is going all out to try and halt the slide in exports.
Consumer prices fell 1.6% last month and producer prices tumbled by 4.5%. Other figures yesterday showed another fall in home prices in China’s 70 largest cities, a sign the domestic economy hasn’t stabilised.
The fall in inflation was good news, but also another sign of the impact of the slowdown on the Chinese economy, as was the 1.2% drop in home prices.
So much for all the bravado from last week about China’s stimulus package dragging the economy and countries like Australia out of the slump.
The talk of a new spending boost lingered in the aftermath of the big annual speech by premier Wen Jiabao where he failed to talk about new spending and committed the country to 8% economic growth this year.
The Financial Times reported on Friday:
"China’s top economic officials said they saw signs of economic recovery thanks to government efforts to boost growth, but analysts warned Beijing might be getting complacent as it tried to shore up confidence amid a pronounced slump.
“We can see the economic figures are already stabilising and recovering, which shows the government’s stimulus policies have started to take effect,” Zhou Xiaochuan, China’s central bank governor, said at a press conference on Friday.
"His optimism was echoed by Xie Xuren, the finance minister, and Zhang Ping, chairman of the National Development and Reform Commission, the country’s powerful economic planning agency.
“The measures taken have been positive and efficient,” said Mr Zhang. “They have been very effective in stopping the slowdown in economic growth, in overcoming the difficulties of enterprises and in expanding consumption.”
But some western analysts thought that was too bullish and too political.
More realistic were reports of exports falling in February and a downturn in steel output and increasing stockpiles of iron ore and coal.
Now there’s news that all taxes on exports are to be cut to zero to try and maintain growth in exports, which fell sharply in January, along with imports, which were down because of falling prices for raw materials.
Chinese exports fell 17.5% in January. There have been reports of bigger falls from some regions last month. (February’s figures should be out later this week.)
A Chinese newspaper reported late last week that exports and imports both fell more than 20% last month.
Falling prices will help somewhat, but rising demand from economies such as the US, Japan and Europe would be more ideal.
The 1.6% fall in Chinese consumer prices in February took the headlines, raising fears of deflation (which will go on for most of this year), but the big fall was the decade’s biggest fall in producer prices: down 4.5% in February after a 3.3% fall in January.
That’s telling us that the fall in the cost of oil, fuel and imports (because of lower world prices), is having a big impact on industry, but not as much as one would think because of the absence of demand domestically or from abroad. Analysts say there’s a large dollop of price cutting by manufacturers.
That’s going on at the retail level, but not by as much. February’s fall in consumer prices came after the 1% rise in January
China’s food price inflation has slowed sharply from the overheated levels from a year ago, which should please the Communist party as it fears rising levels of ‘social unrest’ over job losses.
China isn’t the only Asian country where consumer prices have slowed or fallen: in January consumer prices In Japan were steady, rising fears of a renewed outbreak of price deflation, to go with the fall in asset values.
The fall in prices makes the cut in export taxes and promises of more financial support to exporters more interesting.
From reports, the Chinese government is spinning the moves as a way of helping the country get a bigger share of world trade in the current downturns.
Commerce minister Chen Deming was quoted in an interview in a party newspaper as saying that the country would "use all possible measures to ensure the stable growth of our exports and prevent a large drop in external demand".
"We should increase our share of the global market . . . We must transform ourselves from a big export nation to a strong export nation," he was quoted as saying in translation.
Mr Chen said the government would gradually reduce export taxes to zero while following international trade rules and restricting industries that were highly polluting, energy-intensive or wasteful of natural resources.
He also said Beijing would expand its direct financial support for the development of foreign trade and encourage the export of important products, including those from high-tech or agricultural industries and any that feature home-grown Chinese proprietary intellectual property and branding.
I wonder if that also applies to the export of capital to secure certainty of supply of strategic minerals.
The Chinalco-Rio Tinto, Minmetals-OZ Minerals deals in Australia come to mind and the way Fortescue is increasingly turning to China to provide low cost finance by selling shareholdings.
