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Chinese inflation data came in lower than expected in the wake of the end of three days of trade negotiations between the US and China, negatively impacting the Asian markets and signaling an economic slowdown overall in China.

Key Takeaways

• The PPI rose 0.9% compared to a forecast 1.6% on year in December.
• The CPI increased by 1.9% on year in December, lower than the 2.1% expected and the 2.2% growth seen annually in November.
• Yearly CPI from January to December was 2.1%, falling well short of Beijing’s target rate of 3% inflation.
• The data was released last night at the open of Asian markets which mostly contracted following the report.

The Producer Price Index, which rose 0.9%, measures price increases for producers and manufacturers, and hit the lowest rate of growth since September 2019 in December. The 0.9% increase compares poorly to the 1.6% expected growth and the 2.7% increase seen in November.

The Consumer Price measures the cost of goods and services once they reach consumers.

The lower rate of inflation was doubtlessly influenced by falling energy prices, with China launching multiple large-scale green energy initiatives last year. However, there was also a decline in the price of industrial inputs and final consumption goods as well as diminished demand for goods in China.

All told, the PPI reading from January to December was brought up to 3.5% growth and the full-year CPI was up 2.1%, falling well-below the target inflation of 3% in consumer inflation.

#China's #inflation decomposed! pic.twitter.com/8qWeqXtY7Y

— jeroen blokland (@jsblokland) January 10, 2019

World’s Second-Biggest Economy Slowing Down

There can be little doubt that the second-biggest economy in the world is undergoing a slowdown, with some analysts saying not enough is being done to counteract it. The Chinese economy has an impact on the financial stability of the rest of the world, and it’s likely that the trade war between China and the US is taking its toll.

China has taken measures such as reducing the minimum reserves required to be held by banks in order to issue loans, something which was a contributing factor in the banking collapse seen during the Great Recession of 2008/2009.

Trade Talks

The US and China entered an unscheduled third day of trade talks on Wednesday, with Washington officials stating they would report back to the White House before commencing further talks.

The US Trade Representative issued a statement saying that officials required action to be taken on major issues such as forced technology transfers and the widespread theft of US intellectual property in China, where a blind eye is often turned to the mass production of counterfeit goods, often aided by corporate espionage and cyber theft.

China has also pledged to purchase a “substantial” amount of agricultural, energy, and manufactured goods as well as other products and services from the US, and this pledge is also central to the ongoing negotiations.

The Chinese Commerce Ministry also weighed in to state that the round of trade talks was extensive and laid a foundation for further talks on mutual concerns with both parties agreeing to maintain close contact.

“Initial signs suggest that there is modest momentum building towards a narrow agreement in coming months, but that US trade hawks are fighting an intense rear-guard action to limit the scope of that agreement and keep the pressure up on Beijing,” analysts at political risk consultancy Eurasia Group wrote in a note.

“If a deal is reached, it will almost certainly remain fragile and there will still be a long road ahead of the removal of US tariffs already imposed,” they said.

A cease-fire was agreed in late 2018 with both sides agreeing to impose no further tariffs until early March to allow for these negotiations to take place.

China-US trade talks have ended. Based on what I know, the situation is quite positive. The two sides are still in consultation on the wording of the message, so the two versions can be coordinated.

— Hu Xijin 胡锡进 (@HuXijin_GT) January 9, 2019

Expert Outlook

Nomura economists stated that the slump in producer inflation likely heralded an upcoming decline in corporate earnings.

“Rapidly falling inflation, especially factory-gate PPI inflation, is further evidence that China’s economy is slowing at a worrying pace,”said the analysts, adding that “falling inflation leaves more room for Beijing to roll out more aggressive policies to bolster growth and could lead to lower interbank rates and bond yields.”

Further easing measures are considered likely by many as the government seeks to stimulate the slowing economy.

Evans-Pritchard stated that the inflation data would allow Beijing to loosen monetary policy, saying that “If anything, cooling factory gate inflation will strengthen the case for the central bank to do more to ease financial pressure on industrial firms including by cutting benchmark lending rates.”

David Gaud of Pictet Wealth Management stated that there was a “big slowdown” in the Chinese economy, adding that current measures were insufficient.

 “At best, they could stabilize the situation probably in the second half, and we’re still at the beginning of the first quarter. Whatever they do right now, it’s going to be really tough and the first quarter is going to be challenging,” said Gaud.

Market Reaction

Gold has ticked upward following the news of economic slowdown. Spot gold last traded at $1,290.17/oz, up 0.07% with a high of $1,297.10/oz and a low of $1,290.13/oz, once again drawing close to the crucial $1,300/oz mark.