Yesterday I suggested that July’s PPI inflation might be a little higher than June’s already-high 8.8%. Most other analysts seemed to agree with me, with the median estimate according to Bloomberg at 9.0%.
The actual number, which was released today by the National Bureau of Statistics, was a bit of a shocker. PPI inflation in July rose to 10.0%. Raw material, fuel and power were the biggest reasons for the jump in prices which, according to an article in the South China Morning Post, is the highest year-on-year PPI number since 1995’s 14.9%. Much of the increase can be blamed on rising global commodity prices, which seem to have turned around a little recently, but with continued high prices internationally and shortages domestically, there is a risk that producers will eventually be forced to pass higher prices onto consumers.
CPI inflation numbers are expected to come out tomorrow and I think most of us still think they will be substantially lower than last month’s 7.1%. My expectation has been that we would see moderate CPI inflation for the next couple of months before it picked up again towards the end of the year. The moderation would give further ammunition to those policy-makers more worried about slowing economic growth then about the consequences of unabated money expansion, and I assumed that their current dominance in the policy-making debate would only be strengthened, until inflation reared again late in the year, causing the balance of power to shift once again to the monetary alarmists.
But this PPI number may make up for a declining CPI in its effect on the policy debate. It is very clearly a warning signal that inflation has not disappeared, although falling commodity prices world-wide may relieve some of the PPI pressure in the coming months. As an aside, I have heard several times recently that a very senior policy-maker who has lost a lot o credibility in the last year, a leader of the monetary camp, was going to lose his post in a post-Olympics shuffle (I don’t want to mention who he is because it could get me into trouble, but I suspect a lot of readers know who I mean).
China’s trade surplus for July, also released today, came in a lot higher than expected. Here is Xinhua’s report:
China’s trade surplus fell to 123.72 billion U.S. dollars in the first seven months, down 13.1 billion U.S. dollars, or 9.6 percent year on year, the General Administration of Customs said on Monday. Analysts said the fall was partly a result of China’s policies to tame surplus, but was also in part due to the rising prices in energy and resources China imported.
The Jan.-July exports had increased 22.6 percent year-on-year to 802.91 billion U.S. dollars, however, imports rose 31.1 percent to 679.2 billion U.S. dollars. The total trade volume in the first seven months stood at 1.4821 trillion U.S. dollars, a year-on-year rise of 26.4 percent.
July’s trade volume rose 29.8 percent to 248.07 billion U.S. dollars with exports totaling 136.68 U.S. dollars, up 26.9 percent. Imports were up 33.7 percent to 111.4 billion U.S. dollars. The July trade surplus stood at 25.28 billion U.S. dollars.
The trade surplus for July of $25.3 billion, versus $24.4 billion last July, was much higher than the $20.3 billion median estimate (also much higher than June’s $21.3 billion). On Friday a Bloomberg article titled “China Trade Surplus Likely to Narrow for Fourth Month” had the 17 economists it surveyed predict that exports in July would climb “only” 16.8% year on year. In fact the National Bureau of Statistics release recorded a 26.9% year-on-year increase in exports, a big increase over June’s 17.6% gain.
These kinds of numbers would seem to strengthen the skepticism that analysts like CFE’s Brad Setser have expressed over the story of China’s collapsing export sector. Given the slowdown in the world economy I would have thought that a 16.8% jump in exports, if the pessimistic expectations of most analysts had turned out to be true, would have nonetheless been pretty impressive, In fact I think the woes of a small but powerful segment of the export industry – low-value-added processors in the south of China, who have been hit primarily by rising wages and a welcome shift in the southern economies towards higher-value-added goods and services – have created a false impression about dire conditions for China’s exporters. For such a large exporter to see its exports grow so rapidly, and during a global slump, does not suggest to me an export industry in its death throes.
The good trade numbers and the bad PPI numbers (which will hurt corporate profitability), combined with more worries about political instability in Xinjiang province, had a terrible effect on the country’s stock markets. Declining international fuel prices and a strong market in Hong Kong were not able to alter the gloomy mood on the mainland. After dropping 4.5% Friday – mostly at the end of the day on panic selling – the market opened down today, bounced around during the morning session, and then all but collapsed during the afternoon. The SSE Composite lost 136 points to close at 2469, 5.2% down for the day. That’s nearly 10% in two days, and it would have been worse if some companies today had not hit their 10% limit and stopped trading.
When almost exactly one month ago the SSE Composite finally broke 3000, the level below which it was believed the government wouldn’t allow the market to fall, it lost ground pretty swiftly (down 17.7% in the next month). Rumors quickly emerged that the new minimum level at which the government would support the market was 2300. I have already written several times about how damaging these perceptions of a minimum government-intervention level can be, but I would guess that Friday’s and Monday’s drops have already set alarm bells ringing in the offices of financial policy-makers. If investors don’t see anything being done to stop the slide, after a short rebound tomorrow we could easily see the market test 2300 before the end of the Olympics.