With Factory Deflation Deepening, external demand wavering does China’s first real recession loom?

China’s Producer Price index, that measures the average changes in prices received by domestic producers for their output, fell at its sharpest rate in four years indicating a global slowdown in demand for Chinese goods, according to figures released last week.

That same data showed an unexpected growth in exports in April – perhaps helped by low oil prices – but also showed a stronger than unexpected decline in imports signaling weaker domestic demand.


Producer Prices in China decreased to 96.90 points in April from 98.50 points in March of 2020.

For China this is uncharted territory. It is the first time the NBS has released quarterly negative growth figures since they were first published in the 1990s. The January to March quarter was clearly a supply driven event as China closed down huge sectors of its economy to combat the lethal Coronavirus.

These figures, with the explosion of virus transmission and control measures beyond China’s border, the swelling ranks of unemployed in the US coupled with Washington’s increasingly belligerent stance toward Beijing could be signs of a potentially external demand driven recession could be looming.


China Producer Prices Change

The dire economic impact of the Corona-Virus has prompted the Vice-Premier, Li Keqiang, to to make the unprecedented measure to forgo issuing an annual GDP target.

Some analysts believe the rate at which the PPI are falling will give Beijing room to loosen fiscal measures to stimulate demand. But without the true cost of the epidemic yet known it is difficult to predict how those measures will work. However, with inflation fears diminishing now could be a good time for the BoC to cut borrowing rates.

Climbing Mount Prosperity

China’s Growth record, though impressive by any measure, is in part because of its artificially low starting base. Combining GDP with with other important indicators reminds us of the distance travelled and the cost of investment and industry focused approach to growth.

A look at the GDP per capita data for China underlines the difficulty of the task faced by China at the start of the opening and reform period. Despite near double digit growth for the better part of three decades China, in terms of GDP per capita languishes around the hundredth position on the global league table, with around USD4200 per year in 2010. And although great strides have been made there is a still a long way to go to reach the heady heights of the US.

From another angle, GDP divided by total energy consumption is a measure of the energy intensity of GDP growth and the less directly the cost to the natural environment.

So while westerners might be wowed by the glittering wealth on display in China’s showcase Eastern cities, China still has a long and rocky road ahead to climb mount prosperity.

As Global Pandemic Rages Global Commodity Prices Crash

As countries around the world contend with the health emergency of the COVID-19 pandemic, the economic effects of mitigation measures have immediately impacted the world’s commodity markets and are likely to continue to affect them in the longer term. 

The global economic shock of the pandemic has driven most commodity prices down and is expected to result in substantially lower prices over 2020, the April Commodity Markets Outlook reports. Here is a look at the outlook for commodity markets in six charts.

As countries around the world contend with the health emergency of the COVID-19 pandemic, the economic effects of mitigation measures have immediately impacted the world’s commodity markets and are likely to continue to affect them in the longer term. 

The global economic shock of the pandemic has driven most commodity prices down and is expected to result in substantially lower prices over 2020, the April Commodity Markets Outlook reports.

Here is a look at the outlook for commodity markets in six charts:

1. The pandemic has led to widespread commodity price declines

Mitigation measures taken to slow the spread of COVID-19 have resulted in an unprecedented collapse in economic activity and transport, resulting in widespread declines in commodity prices.  Most commodity prices are forecast to be lower in 2020 than 2019, with energy the most affected, and agriculture the least. The risks to the price forecasts are large in both directions and depend heavily on the speed at which the pandemic is contained and mitigation measures are lifted.

2. The crude oil market has been affected most by the pandemic

The outbreak of COVID-19 has had the largest impact on the crude oil market, as two-thirds of oil is used for transport.  Crude oil prices are forecast to average $35/bbl in 2020, reflecting an unprecedented collapse in oil demand. Brent crude oil prices have declined 70 percent from their January peak, and a historically large production cut by the Organization of the Petroleum Exporting Countries and other oil producers failed to lift prices in April. All crude oil benchmarks have seen sharp falls, with some briefly dropping to negative levels. Crude oil demand is expected to decline almost 10 percent (y/y) in 2020, more than twice as much as any previous fall.

3. Metals have fallen as industrial demand has collapsed

Most metal prices declined in the first quarter of 2020, reflecting a collapse in global industrial demand due to the COVID-19 pandemic. 

Stimulus measures and rising supply concerns have had a limited impact so far in supporting metal prices. The declines in metals prices resulting from the COVID-19 pandemic are—for now—less severe compared to the global financial crisis.

4. Prices for food commodities except rice fell

Most food commodity prices declined in response to mitigation measures to contain the spread of the COVID-19 pandemic, record production for some grains, and favorable weather conditions in key producing regions.  Rice prices, however, increased due to announcements of policy restrictions by some East Asian producers and weather-related production shortfalls.

5. Despite well-supplied markets, food security is a concern

Global food markets remain well supplied due to bumper harvests, especially in maize and wheat and major staple food commodities, stock-to-use ratios are very high by historical standards.

Nevertheless, hints of hoarding by some key exporters, and excess buying by some importers have raised concerns about food security

If concerns of shortages become widespread, hoarding may result leaving low-income countries vulnerable to food insecurity, as food accounts for a much larger proportion of their consumption than in more developed economies.

3bn RMB in Consumption vouchers?

In an effort to re-float the economy after the draconian – but effective – shutdown that all but rid China of the Covid-19 scourge, many local administrations have begun issuing digital consumption vouchers similar to Groupon style activities through the nations’s mobile payment platforms to boost the coronavirus-hit economy, but some experts seem skeptical.

Consumption vouchers, some of which are digital and accessible through platforms including Ant Financial Services Group’s Alipay and Tencent Holdings Ltd.’s WeChat Pay, have been distributed across 28 provincial-level regions and over 170 prefecture-level cities, according to Wang Bingnan, a deputy head of the Ministry of Commerce last week.

Wang said that the value of the already distributed vouchers, which can mainly be used for retail and catering spending, amounted to over 19 billion yuan ($2.7 billion). A sharp contrast to the trickle down stimulation efforts by western governments.

China Becomes Worlds Largest Issuer of Corporate Debt

According to a recent report by Standard and Poor China has become the world’s largest issuer of corporate debt, citing a total non-financial corporate debt figure of USD 14.2 trillion. This however underscores the difficulty statistics present when making cross-country comparisons.

The S&P report relies on figures released by the People’s Bank of China, but include one important oversight. The PBoC counts all non-financial corporate debt, including that owned by local Government financing vehicles (LGFV.) A closer look at the data shows that although Chinese companies are on track to overtake their US counterparts in terms of debt, but still a way to go. Including these LGFVs is like including the debt of Detroit alongside that of American Airlines.

That said, differentiating who owes what to whom, doesn’t decrease the overall amount of debt building up in the system. One particularly worrying development was China’s first default on domestic bond market since the central bank started regulating the market in 1997.

On March 4th, when Shanghai Chaori Solar Energy Science and Technology declared it lacked the funds to make full interest payments on its corporate bonds no government assistance was forthcoming. While this failed to lead to any significant knock on effects, it did signal the Chinese government is no longer prepared to keep underwriting the bad debts of client corporations.

Many feel that the lack of intervention was meant as a subtle nudge to the market to start pricing risks appropriately.  However, the overall build-up debt in the Chinese economy remains a cause for concern as a string of such defaults in rapid succession could lead to a chain reaction and panic.