The Chinese Inflation Trap; Or, Why the Consensus Can Eat It

China posted trade data for January today, following up on a flurry of interesting data points:

    

YoY Exports (White line) & YoY Imports (Blue line) - 2006-2012

Despite the focus on the potential drag from a European slowdown on China, exports, which were stagnant year over year, are essentially beside the point.  The real issue is the unsustainable domestic investment economy and with exports flat YoY and imports down 15% YoY this is a terrible data point.  There as been a lot of discussion about the comparability of the data owing to the impact of the New Year’s holiday (although the Customs Administration does seasonally adjust their figures), but I believe there is an increasingly clear downward trend in the more reliable data available.  For those not up to speed, this is my perspective on China.  It is not positive.  I’ll return to the bigger picture in a moment, but for now I’d like to return to a subject previously discussed here.  

China Data Point Du Jour & the Ozzie Commodity Boom

Courtesy of the Reserve Bank of Australia:

Seems to correspond to a lot of the non-manipulated data we've seen of late.

Australia is an interesting corollary for China observers due to the impact of Chinese commodity demand on the country's booming resource sector.  As a reminder, about 1/4 of commodity revenues in Australia are from iron ore and around 1/3 come from coal.  China buys almost all of the iron ore in the global export market while demand for coking and thermal coal is also substantial if not quite as dramatic.  With Australia a cheaper option for Chinese mills than long-hauling ore from Brazil, and with lower cost coal mines than China's domestic producers, the Australian resource sector has been on an almost uninterrupted tear for almost a decade.

No Hard Landing for China, Just an Old Fashioned Crash

About a year ago I began compiling a slide deck on the short case against China in an effort to formalize my thought and form an actionable thesis.  This proved to be fairly all-consuming endeavor and led to a substantial amount of highly enjoyable work that I summarized in a rather long-winded, sometimes polemical (and now slightly out of date) PowerPoint presentation.  My focus is towards the most misunderstood elements of the modern Chinese economy and reflects a perspective sharply at odds with the Western consensus.  Of the ‘soft landing’ camp I am not. 

In my first of what will hopefully be many, if irregularly published, pieces I’d like to briefly touch on my perspective of the Chinese slowdown and its prospects for 2012.

To bring readers up to speed, the situation has recently taken a turn for the worse. The Chinese debt cancer has continued to metastasize. Loathe to loosen in the face of vast demand from local government clients for stimulus, the center has been forced into action by the potential of a looming global slowdown; the Chinese economy, and especially the property markets, however, had already been showing signs of strain.  The domestic outlook has been increasingly poor with even the heavily massaged official domestic data looking worse and worse. However, the Chinese policy elite remain trapped between a very real economic (and increasingly pressing social) need to cool inflation driven by unchecked credit growth and the demands of Ponzi growth targets (to be achieved by the aforementioned credit growth).  Absent genuine reform and liberalization, the inherently inflationary tilt of China's managed economy will continue to plague policymakers even as economic activity slows; it is endemic to the model.  Unfortunately, such a fundamental change requires an autocratic oligopoly of the ruling elite to voluntarily relinquish their total control of a massive wealth-generating machine. 


Increasing cognizance of the fact that the $3+ trn of dollars of spoils from mass economic manipulation and top-to-bottom accounting fraud may already be largely spoken for has begun to percolate in the western media. The scale, opacity, and complexity of China's closely held financial system will limit comprehension of the full extent of the problems for most Western observers before it is already well underway.