Why is consumer deflation deepening in China?

CGTN Europe

CGTN Europe interviewed Marc Ostwald, Chief Economist & Global Strategist, ADM ISI

Transcript

00:00Well, let's talk now to Mark Oswald, the chief economist and global strategist at ADM Investor Service International.

00:07Mark, welcome back. What are your main takeaways from China's economic figures,

00:12particularly this worsening producer deflation and weak consumer prices?

00:19Well, I think in terms of the inflation numbers or other deflation numbers,

00:25one also has to sort of have a look at some of the breakdown of this.

00:30We all recall that BYD introduced those massive auto price cuts last month,

00:36which obviously have been very effective, given that the new auto sales this month were up 13.3 percent,

00:43with new electric vehicles up almost 28.1 percent.

00:48So when one looks at the breakdown of consumer prices,

00:52you see that there's a 4.3 percent drop in transport and communications,

00:58which is the biggest negative in year-on-year terms within there.

01:04That said, it still reflects a lack of pressures elsewhere.

01:12Basically, you know, lack of demand basically is not creating any sort of spikes higher in inflation.

01:19On the producer price fund, I would be a little bit more careful.

01:25Energy price is clearly a big consideration.

01:28That's true across the world.

01:30It's driving down inflation in the eurozone.

01:33To a certain extent, the UK is capping it in the US.

01:36It's all down to lower oil prices.

01:40It's also in China, you know, coal prices have fallen quite substantially,

01:45which also distorted some of the trade numbers in terms of the weakness in imports,

01:50was due to much more competitive domestic prices.

01:53So some of, you know, coal is being competed with both by, you know,

02:01there is a certain lack of demand in demand from power,

02:05but that's also a reflection of a massive boost to renewables output.

02:10So this is the stuff of transition.

02:14But in effect, China is still basically a inflationary influence upon the rest of the world.

02:22To what extent would you say these figures reflect structural issues versus short-term shocks,

02:30such as the trade tensions or perhaps policy shifts?

02:36It's a mix of the two.

02:38In terms of the trade numbers, you know, that big drag from the US,

02:44you know, I think it's important to understand just how big a shift there has been

02:49in Chinese exports over the last 10 years.

02:53You know, just before the Trump 1.0 tariffs,

02:57the US accounted for 27% of external demand for China.

03:02That's now below 18% and it's going to sink even further with these tariffs as they are at 40%.

03:08On the other hand, there are structural issues.

03:11I think, above all, the problems from the property sector

03:16and the fact that so much money in terms of private savings is locked up in it.

03:22And, you know, it's an enormous drag.

03:25And the fact, on the other side,

03:27that there needs to be a development of some form of social security,

03:32a social security net.

03:36Now, there's work being done on that,

03:39but as long as it's not there,

03:41the propensity to spend,

03:43particularly in an environment where demand,

03:47the demand outlook is, you know, is very uncertain,

03:50not only because the property sector is not contributing what it was,

03:55but also because of the external factors due to trade tensions.

03:59You know, pay has not been rising much for the best part of 18 months.

04:06You know, the propensity to save rises,

04:09we saw that in the Eurozone when, you know,

04:12rates were zero for so long,

04:14and people said, well, people will probably go out and spend it.

04:17Well, actually, that particular part of economic theory doesn't work at all.

04:21In fact, what people tend to do is double down on their savings.

04:24And I think we're seeing this phenomenon repeated in China.

04:28Given all of that, then,

04:30could continued weakness in imports and domestic demand derail China's broader growth this year?

04:38I think it's going to continue to be a mixed story.

04:44There are areas where there is a huge amount of excess capacity,

04:48particularly those areas on demand from the real estate sector,

04:53be it commercial or residential.

04:56There are other areas which are still rapidly growing,

04:59particularly the high technology areas,

05:01anything to do with renewables,

05:05areas where China just has such a quantum advantage over the comparative advantage over the rest of the world.

05:14Remember that China accounts for 70 percent of all intermediate goods production in the world.

05:20If anyone thinks they can decouple from that,

05:23they really need to think again unless they have a long term plan.

05:27And I'm talking decades to revitalize their own industries and very deep pockets,

05:33which, as we know, in a very indebted world is not the case.

05:37Mark, good to see you.

05:38Thank you for that.

05:39Mark Oswald, the chief economist and global strategist at ADM Investor Service International.

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