Wednesday, June 14, 2023

What's that Got To Do With The Price Of Pork In China?

Pork prices are one of the most basic indicators of the health of the Chinese economy.

Our proxies are hog futures on the Dalian Commodities Exchange. For folks paying attention, the months-long sideways move, here using the September futures as the example, the sideways move from mid-January to mid-April put the lie to the hubbub about the Great Reopening. The move up from December 2022 was all anticipatory emotion rather than actual demand:



The reason we are pointing this out today is the possible double bottom and the mini-rally over the last couple days. Again, like the December rally, traders may just be optimistic about recent events, in this case the loosening implied by the rate cut by the People's Bank of China but the directional change is definitely worth noting.

The negative spin on the rate cut would be the one we used on Tuesday, that it's classic "pushing on a string" i.e. the problem isn't the cost of money but rather the lack of demand for money.

In this sort of situation, if the money isn't going into domestic demand in will go into financial assets. In the West the Central Bankers say about that reality "We meant to do that, it's the Wealth Effect' whereas it's actually the Cantillon Effect where the people who get the money first get to take advantage of prices that haven't yet moved and are thus lower for them than for those who follow them in. 

Unfortunately for us, this time it is tougher to distinguish between a real demand driven move and a speculative "close-your-eyes-and -bet-on-higher" than it was in January, for another very basic reason: We had the Chinese lunar New Year on January 22 to tip us off.

As repeated in May 15's ""China Data Dump Total Disaster; Youth Unemployment Hits Record High"":

....the point of the intro to and outro from January 31's "What If China Had A Reopening And Nobody Cared?":

China isn't reopening, it has reopened. This is it. And despite the record savings the population has accumulated over the last three years we are not seeing a wave of demand in the domestic economy. Using one of the most basic proxies for what is actually going on, the price of pork, the grand reopening, is, to say the least, muted. This is especially true considering the country just celebrated the largest, most festive holiday on the calendar....

So there you go, a definite maybe.