Gaming China

Man oh man. The "Macro Man absent from his office" trick worked once again, as financial markets performed more gyrations than a gold medal-winning gymnast on Monday and Tuesday. Those who chased the price action such as, alas, Macro Man's carry basket model, have no doubt rued their impetuosity, as the volatility has proved sufficient to enable one to lock in a tasty loss by selling weakness and getting squeezed into covering.

And really, we're none the wiser, as the S&P 500's bum-clenching round trip over the past few days has occurred on realtively no news. All the more reason, then, to try and keep one's head and avoid over-trading.

There has, on the other hand, been a raft of key data released in China this week, and the developments are sufficiently curious as to inspire Macro Man to devise a simple game for the pleasure of his readers. Hearkening back to the old Sesame Street song, which of the following developments is not like the others; which of the following just doesn't belong? Answers on a postcard addressed to Macro Man Towers (or at least via the comments section!)

1) China's CPI inflation registers 6.5% in October, the joint highest level in more than a decade. Macro Man's jaw continues to drop at the number of commentators who appear willing to blame the rise in CPI on one-off factors, such as the blue ear disease that has driven up pork prices. Non-food CPI remains well-contained at 1.1%, the argument goes, so there's no real reason to worry about the medium term inflation trend.

Riiiggghhhhtttt. While it's true that food inflation has been extremely high at 17.6%, it would appear to be inaccurate to lay the blame solely at the door of temporary factors such as the porcine malady noted above. True, pork prices are up 54.9% y/y, and Macro Man is happy to put that down to temporary distortions. But how in the world does blue ear disease drive up the price of eggs by 14.3% y/y? The price of fish by 7% y/y? The price of vegetables by 29.9% y/y? Any farm-working readers should feel free to chime in. More to the point, if Chinese food inflation isn't a durable phenomenon, why has the delta of inflation been virtually identical to food inflation in the US over the past several years (see chart below)?
Moreover, the non-food pricing looks decidedly dodgy. The "vehicle fuel" component of CPI is down 1.4% y/y. Now, maybe petrol prices really have fallen in China, unlike anywhere else on planet Earth. Of course, that's difficult to marry with the stories on multi-hour queues and fuel rationing at petrol stations. While there may be distortions to Chinese CPI, it would appear more likely that they are depressing rather than elevating the true level of consumer price inflation- the recent 10% rise in administered energy prices looks like nowhere near enough to replicate a market equilbrium price. In Macro Man's view, inflation remains a very real problem for China.

2) A record trade surplus. Yes, October's trade surplus fell short of market expectations. But it still registered a whopping $27.1 billion. Perhaps the growth in trade is showing signs of deceleration, but if so that only represents the achievement of the policy preferences spelled out by the regime. In any event, it's still a bloody big number....and it's growing.

3) M1 growth of 22.1% y/y in October; M2 growth rose to 18.5%. Chinese money growth remains very robust, exceeding both expectations and the PBOC's target levels. The reason isn't particularly difficult to understand; PBOC is intervening heavily in the FX market but only partially sterilizing the proceeds, thus leading to a net "printing" of RMB in the process. Given growth and inflation in China, it's small wonder that banks are not terribly thrilled about parking their money in sterilization bills yielding peanuts, particularly as their deposit bases are beginning to contract. Perhaps that is how the stock market bubble will finally feed therough into macroeconomic policymaking; if banks' deposit bases continue to shrink, then it will make it very difficult indeed to force banks to participate in exchange rate sterilization via bill purchases or even RRR hikes without finally slowing the economy.

4) USD/RMB has reversed its decline this week. So CPI, the trade surplus, and money growth all accelerated in reports released this week....and the policymaker response is to weaken the currency?

Go figure....