The Signal For A Potential 2nd Round Of Inflation
It Could Come From Chinese Stocks
It probably goes without saying that China has one of the least attractive economic backdrops in the world today. The nation’s economy was crushed during the draconian COVID lockdowns that lasted for nearly three years and were only lifted at the end of 2022. It was expected that a surge of pent-up demand would be unleashed in 2023 as consumers were finally free to spend. While consumer activity picked up for a little while, the spending boom never really happened and the economy has been struggling ever since.
The real sector is on the brink of full-blown collapse as years of over-construction and too much leverage are finally catching up to it. Demographics are trending in the wrong direction. The consumer is looking as weak as it has in the post-COVID era. Both consumers and investors are waiting for a huge stimulus package from the PBoC to reinvigorate the economy, but the government is already up to its neck in debt and may not have the capacity to rescue it.
Chinese stocks are roughly 60% off of their highs and are back below the levels they were at in the late 1990s.
While the economy managed to hit its 5% GDP growth target for 2023 (it came in at 5.2% officially), it’s in a very bad place right now and may struggle to right the ship for a while.
One thing that largely hasn’t been a problem over the past few years, as it has almost everywhere else in the world, is inflation. That’s because China is dealing with outright deflation! Consumer prices are actually down 0.3% over the past year and have been struggling to keep the annualized inflation rate above 0% for months.
A big part of this is because China is such a commodity-driven economy. If Chinese stocks have fallen significantly over the past three years, it probably stands to reason that we’ve seen commodity prices falling over that same time.
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