Charts of Week: Deflation Fears Cast a Dark Shadow; Is China Heading for a Recession?
Charts of Week: Deflation Fears Cast a Dark Shadow; Is China Heading for a Recession?
Week of Apr. 17, 2023
Datapoints covered in this issue:
Consumer sentiments regarding deflation fear
Offline consumption and online consumption
Passenger car purchase
Real estate
Income Expectation & Employment Outlook
Export
China recently released mixed economic data:
On the positive side: the country's GDP Growth Rate YoY was at 4.5%, Industrial Production YoY at 3.9%, Unemployment at 5.3%, Retail Sales YoY at 10.6%, and Exports YoY at 14.8%——all beating expectations.
However, concerns over deflation are looming: with Inflation Rate YoY slowing to 0.7%, PPI YoY continuing to decline to -2.5%, Imports YoY shrinking to -1.4%, and fixed asset investment (YTD) YoY slowing to 5.1%.
It may not be immediately apparent how to interpret these results and identify key issues regarding China's economic recovery. Here’s our take:
As the US and Europe fight to stabilize inflation, fears of deflation now loom over China.
China's March CPI rose by 0.7% YoY, marking its slowest pace since September 2020. Meanwhile, PPI fell by -2.5% YoY, continuing the downward momentum from February's -1.4% YoY.
Fears of deflation in China surged after the release of March data, according to BigOne Lab's social sentiment data. Similar spikes appeared in March (when Feb data was released) but with much less magnitude. Notably, Douyin and Weibo led the increase this time around, indicating that the worry has spread to the general public.
Note: Douyin, Kuaishou, and Weibo are platforms that better represent the general public's sentiments, unlike WeChat Official accounts, which generally include articles by independent writers, professionals, and established media.
Is China in deflation?
Technically, no. We need a general decline in price levels and a contraction in the money and credit supply to call it deflation. Here are key charts to understand the current situation in China:
So what are the key observations here?
CPI is disappointing, but it’s not in negative territory yet
(Chart on the left) M2 in Feb just hit a seven-year high (+12.9% YoY). Credit is also improving, as aggregate financing recovers and enters back into the +10% YoY territory.
(Chart on the right) Saving & overall RMB deposits hit 5-year high. (In addition, M1 and M2 continued to widen in March, indicating that more money has gone into time deposit and personal savings.)
Some may argue that more monetary stimulus is the cure, but it's clear that the problem is not the lack of money. M2 has flowed to corporations and businesses seeking financing, rather than directly to households. For the portion that did flow to consumers, households have preferred saving over spending.
Consumer Outlook
Offline consumption is continuing its strong recovery
BigOne's tracked offline catering revenue surged by 56% YoY in the week ending April 9th, following the +50% YoY increase that was observed a week earlier.
Major e-commerce platforms, JD, Tmall, and Douyin, recorded a 9% year-on-year increase in online sales
Consumer spending has improved across most categories. In March, the fastest-growing subcategory within the most-improved Clothing & House Textiles category was Sportswear (+42.62% YoY). Within the Food & Beverages category, the fastest-growing subcategories were liquor (+45.23% YoY) and health supplements (+38.08% YoY).
However, 3C Products and Home Appliances remained flat. These trends signal that consumers are shifting towards leisure-related shopping but are holding off on purchasing large-ticket discretionary items.
Passenger car sales have seen an uptick in the first half of April, supported by nationwide subsidies and discount programs
During the first week of April, the floor space sold decreased from the March high
According to weekly data published by China Real Estate Information Website, the floor space sold for residential housing (including houses developed, constructed, and sold or leased by real estate development enterprises) in 12 major metropolitan cities, dropped from its March peak. This decline was mainly led by the first-tier cities (Beijing, Shanghai, Guangzhou, and Shenzhen).
Social media sentiments regarding property purchasing remain steady.
Income Expectation & Employment Outlook
The number of job posts decreased year-on-year in March, showing only moderate improvement from January and February.
Typically, there is a seasonal peak in the Chinese job market during March and April following Chinese New Year (and also in August and September).
Social media sentiment data from BigOne Lab shows that posts about "Lying flat" (which loosely translates to "going goblin mode" or "quiet quitting") and unemployment have been trending higher since 2022. Notably, more people were discussing difficulties with finding jobs in March as the job hunting season started after Chinese New Year.
Social media sentiments towards income expectation generally remained steady in March. However, we do notice that discussions related to “saving” has been steadily increasing since September last year.
Social sentiments, along with the flat job posting data in March, suggest that people are being cautious about the employment and income outlook. Although credit and employment have been improving since the lifting of the zero-Covid policy, the job market has yet to completely return to its previous state. Some people are choosing to save preventatively, as indicated by social sentiment and the earlier mentioned increase in nationwide savings and deposits data.
Export: The Surprising Comeback in March
China posted an impressive 14.8% year-on-year increase in exports, significantly beating expectations. The high export growth was mainly driven by emerging market countries such as ASEAN, Africa, and other countries along the "Belt and Road" route. While this surprising comeback marks the resilience of China's exports, it's important to gauge whether the momentum can be sustained, given the broadly weakening demand across the developed economies.
My takes
I think it's overly pessimistic to call the current situation in China a deflation. I do not expect China's overall economic recovery process to be linear coming out of three years of Covid.
However, I do believe the concerns and worries are warranted. Although exports have always been an integral part of China's economy, the country will need to rely on domestic consumption, considering the geopolitical tensions and the broadly weakening demand across the globe.
The real stimulus that should follow is policy aimed at boosting domestic consumption and employment, rather than more monetary stimulus. As shown by data, I do not believe there is any structural crisis just yet, but the real challenge is to find the effective stimulus for boosting domestic consumption (a viewpoint also shared by economists and experts, as reported by Pekingnology). I do not believe it will be a smooth process - Chinese households have the habit of saving even during times of economic stability, so it will take effort to boost consumers' confidence and incentivize spending in a time where things are uncertain.
