Friday, December 16, 2022

"US ‘peak’ inflation talk misses the China point"

It is not so much the reopening (yet) as the amazing amount of stimulus that has been and will be poured into the Chinese economy that raises the inflation risk. 

China's mercantilist/export oriented approach to growth is going to run head-on into recession in their major trading partners. 
December 14's "Dear China, Thanks For All The Stuff But I Think We're Good For Now (U.S. imports plummet)" was one example but at the same time you have a couple trillion yuan worth of liquidity going into the property sector to stave off collapse. 
Add the "QE with Chinese characteristics": "China Quietly Launches QE: Beijing Orders Large Insurers To Buy Bonds To Contain Selling Panic" and the risk is that the domestic economy sees stagflation and if the inflation half of the malady is in food the government/party will have a real problem on their hands. 
Go long garlic and pork. 
 
Perhaps accompanied by a nice Chinese domestic wine, maybe a Changyu to round out a tasty portfolio. 
And riot gear should the tear gas start flying.

From Asia Times, December 16:

Cost of everything from oil to food to to consumer goods will spike everywhere as China reopens from zero-Covid lockdowns 

Euphoria over a “cooldown” in US inflation ignores a vital variable: how China’s reopening process is about to propel commodities prices even higher.

This cooldown argument is fast gaining currency following reports that showed prices rose just 7.1% in November year-on-year. US Treasury Secretary Janet Yellen has hit the news circuit to make the cooldown case.

With the most aggressive Federal Reserve tightening cycle since the 1990s and the inflation-reduction scheme enacted by US President Joe Biden’s Democratic Party, Yellen says prices are going to continue surprising to the downside.

But not if China’s Covid reopening trade has anything to say about it. The sheer speed of President Xi Jinping’s pivot away from “zero-Covid” lockdowns is about to reintroduce the power of Chinese demand into global goods markets.

As 1.4 billion Chinese move around more and spend more freely, the cost of everything from oil to food to airfares to lodging to consumer goods everywhere will soon experience one of history’s greatest demand-pull inflation surges.

“Surely it will push up global inflation if China reopens fully,” says economist Iris Pang at ING Bank. “There will be more international travel, more sales, more production.”

In a recent report, economists at the New York Federal Reserve argued that “what happens in China does not stay in China.” They conclude that “specifically, we find that expansionary credit policies in China lead to notable increases in commodity prices, global production, and GDP outside of China driven by higher Chinese demand.”....

....MUCH MORE

Our takeaway? For now watch the Chinese liquidity pump and the Chinese Credit Impulse.