This obscure Chinese data release could determine the future actions of major central banks

Zhai Yujia/China News Service/VCG via Getty Images
  • China is a major manufacturing exporter, meaning changes in prices there are often influential on broader global inflationary pressures.
  • ANZ expects producer price inflation in China will contract mildly this year, exacerbating an “already muted global inflation environment”.
  • It says such a scenario will weaken the case for further policy normalisation in the US and delay policy tightening in the euro area.
  • A failure for the US and China to resolve their differences on trade could create additional downward pressure on global inflationary pressures.

If you’ve got a keen interest on what the future holds for global inflationary pressures, and hence the outlook for monetary policy from central banks, you may want to keep a close eye on Chinese economic data released this week.

In particular, Chinese producer price inflation (PPI) for January.

As seen in the chart below from ANZ Bank, where Chinese PPI moves, trade prices tend to follow.

ANZ Bank

ANZ says this relationship is not all that surprising given China is not only the world’s second largest economy these days, but also a major manufacturer and exporter.

“Given that China is the world’s second largest economy and is deeply integrated into global supply chains, a disinflationary pulse from the Chinese economy will likely be transmitted to other economies,” says ANZ’s Asian Economics team, lead by Khoon Goh.

“Transmission can occur directly, via import and export prices, and indirectly primarily via commodity prices.

“The high domestic value add in China’s exports to most Asian and G7 economies mean that a significant component of the final export price is determined domestically.

“This is why China’s PPI is strongly correlated with global export prices.”

So what does ANZ expect will occur this year?

In short, it expects Chinese producer prices, also known as factory gate inflation, will be very weak, an outcome that will weigh on global trade prices, broader inflationary pressures and, in all likelihood, keep monetary policy tightening from central banks to a minimum, if at all.

“Our baseline forecast for China’s PPI in 2019 is for a mild contraction of 0.01% on an annual average basis,” ANZ says.

“This forecast is based on our expectations of further reserve requirement ratio (RRR) cuts totalling 100 basis points, and that the targeted easing measures would be able to arrest the downtrend in the PPI, as well as a commodity price rebound amid the US-China trade truce.”

ANZ says such a scenario will “exacerbate an already muted global inflation environment,” weakening the case for further policy normalisation in the US and delay policy tightening in the euro area.

It also suggests that upstream price pressures from within China are unlikely to emerge given policymakers are unlikely to announce large-scale stimulus spending given already elevated concerns about debt levels and financial stability risks.

ANZ says that the weak global inflationary pulse from China may be exacerbated further should trade tensions with the United States remain unresolved.

“The resolution of the US-China trade dispute will determine the degree of pass-through of China’s disinflationary impulse into global inflation,” ANZ says.

“If tensions persist, the contraction in the PPI will be broader and deeper, as will its impact on global inflation.”

China’s PPI data for January will be released on Friday, February 15. According to the median economist forecast offered to Reuters, growth over the year is expected to slow to 0.4%, the weakest increase since September 2016.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.