The conclusion that China’s economy has
begun to decline again can’t be made through the simple comparison between PMI
in April and that in March. Instead, April’s PMI and many sub-indexes are the
second highest among the past several months, which indicate that China’s economy
is still recovering. Though lower than that in March, PMI in April is yet the
second highest among recent 10 months. Meanwhile, as the PMI in March increased
1.2 compared with that in February, the decrease of 0.1 can’t declare the
deterioration of economy.
Historically, there were some cases that
the PMI declined slightly after a sharp increase in the recovery stage. For
example, in 2009, the PMI went up by 1.1---to 53.5---compared with that in
March. But the index was 53.1, 53.2 and 53.3, respectively in later three
months, in which the economy was obviously in the stage of rapid recovery. So
the current situation might be the repetition of history.
In sub-index, PMI’s Production Index
declines by 0.1 to 52.2 and Fresh Order decreases 0.4 to 51, both of which are
down from a high point, however, it is not a sign of tendency. Meanwhile,
Material Inventory Index drops 0.8 to 47.4 and Manufactured Inventory Index
falls by 0.5 to 45.5, which indicates that enterprises are still in the stage
of de-stocking.
Low inventory level remains one of the
impetuses for future economy recovery. Besides, Import Index declines by 0.6 to
49.5 in April, which is the second highest during the past 28 months despite a
high drop compared with that in March which indicates the strong performance in
import. What’s more, the Employee Index drops by 0.3 to 47.8, a second peak
among the past 7 months. And the Material Purchasing Price Index continues to
rise from 55.3 to 57.6, a zenith since June, 2011, which indicates PPI
(Producer Price Index) would pick up sharply---probably to around -3%.
The rebound of PMI purchasing price
forebodes the recovery of PPI. Along with the decline of PMI, the concern for
stagflation restrikes again in market. There is no need to worry about it.
Firstly, the MPI in April is still the
second peak during the past 10 months, which can’t indicate the decline of
economy.
Secondly, the rebound of PPI means
industrial sector has made a further step away from deflation. From 2014 to
2015, the market reemphasizes that deflation deteriorates economy, so now why
not admit that getting away from deflation is conducive to recover economy?
Thirdly, there were four types of deflation
in history----the shock of oil supply in 1970s, state turmoil in the period of
the Republic of China, the collapse of exchange rate in emerging countries
recently and Japan’s tax reform in 2014, among which no one was caused by the so-called
monetary excess.
Fourthly, if the monetary excess can cause
the inflation, why Japan and Europe are worried about the stillness of
inflation?
Fifthly, the main logic of theory of
stagflation is monetary excess, but its supporters have never explained the
specific path of causing inflation. They think that the monetary excess can
result in inflation through some mysterious black box process.
In fact, the result of monetary excess is
only the rising price of financial assets and price bubble of financial assets,
rather than the crazy purchase of food and industrial raw material. Only invest
financial assets can we acquire capital gains.
Sixthly, the reason for this round of
industrial price rebound is the recovery of real estate and infrastructural
investment. If there is no final demand, it’s difficult to seek buyers for the
hoard of bulk commodities. The only way for speculation of bulk commodity is
futures due to the high cost of speculating spot goods.
However, the spot price of deformed steel
bar is still remarkably higher than that of futures, which indicates that the
speculation of futures isn’t the main reason for the rebound of bulk commodity
price, not mention to monetary excess;
Seventhly, in the modern financial system,
the result of monetary excess is the assets price bubble, rather than
inflation. Even if there is inflation, it would be following the economic
recovery. Currently, China’s economic perspective is in recovery, overheating or
recession while the possibility of stagflation is approximately zero. Those who
take bearish attitude on economy development may also take the same attitude on
bulk commodity price and inflation because the recovery of economy is the
necessary path to rebound of inflation; it’s contradictory for them to be
bearish on economy and bullish on inflation.
For future economic situation, there are
three risks that policy level and market should be vigilant. Firstly, the
rebound of real estate might be strangled by the too-strict regulation;
secondly, China’s worry on economic overheating and inflation might cause the “loose
fiscal policy” and “easing credit and loan” end with a bad result. Thirdly, the
contagion of credit exposure might cause the shrink of bond and credit
financing, resulting in the shortage of fuel for economic recovery. Currently,
there are more or less signs for these situations. So the policy level should be
aware of it in the initial stage of economic recovery, so as not to throttle
the hard-earned recovery.
It needs to be emphasized that after the
search of economic bottom since 2014, the execution of Monetary Easing Policy
in these two years receives little gains. By comparison, the policy of loose
finance, easing credit and real-estate stimulus achieve notable outcome though
they are just operated for several months. If the economy faces downward risk
again, we need to raise the position of finance, but not enlarge monetary ease.
Otherwise, it can only cause new assets price bubble.
Here are the conclusions of viewpoint:
1. The conclusion that China’s economy has
begun to decline again can’t be made through the simple comparison between PMI
in April and that in March. Instead, from the perspective of longer time
series, April’s PMI and many sub-index are the second highest among several
months, which indicates that the economic recovery is still continuing
2. There were four types of deflation in
history----the shock of oil supply in 1970s, state turmoil in the period of the
Republic of China, the collapse of exchange rate in emerging countries recently
and Japan’s tax reform in 2014, among which no one was caused by the monetary
excess.
3. In the modern financial system, the
result of monetary excess is the rising price of financial asset because only
the financial assets can preserve and appreciate value. If there isn’t final
demand, purchasing physical assets would be end with sadness. This round of
bulk commodity recovery is due to the rebound of final demand and shrink of
supply, but not monetary excess.
4. We can’t think for certain that monetary
excess causes directly inflation because economic recovery and rising demand is
an unavoidable path for causing inflation by monetary excess; this path may be relative
to monetary excess, but monetary excess promotes the economic growth and
inflation at the same time. It can’t skip the stage of recovery and overheating
to the stagflation. Therefore, it’s contradictory to be bearish on economy and
bullish on inflation.
5. On the whole, the economy will remain
recovering unless policy level makes serious mistake; and the sustainability of
recovery will be longer if the rebound at the beginning is not so strong. In
2016, we insist on real-estate investment and loose finance. And “the return of
recycle” is the key point for this round of economic recovery. This year, the
turning point of L shape in China’s economy has passed, so it’s a serious
mistake to be bearish on China’s economy.
6. For financial market, basing on the
logic of recovering fundamentals, we take bearish attitude towards bond market
and bullish attitude on bulk commodity and China’s “healthy bull” stock market
in a long term.
* This article is an edited and translated version by CCM. The original article comes from laohucaijing.com