Mar 11 / Alef Dias

Macroeconomics Weekly Report - 2024 03 12

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China shows signs of recovery

  • Significant challenges have been present for the Chinese economy. However, recent developments have improved the outlook for the Chinese economy.
  • China's CPI rose 0.7% year-on-year, breaking a four-month streak of declines. The reading was above market expectations of a 0.3% increase.
  • Chinese Premier Li Qiang's first budget indicated a strong commitment to growth. The 5% target for 2024 sets a high bar, given a more challenging base than last year - and achieving it will require more stimulus.
  • Export growth accelerated to 7.1% YoY in January-February, compared to 2.3% in December, coming in above the consensus estimate (1.9%). Imports, meanwhile, grew 3.5% YoY in the two-month period, following a 0.2% increase in December, beating the consensus forecast (2.0%).
  • However, many of the challenges to Chinese economic growth remain, requiring a certain amount of caution

Introduction

Significant challenges have arisen for the Chinese economy. The real estate sector is weak, with less and less stimulus, youth unemployment has risen, the currency has depreciated sharply in the last year and the deflationary scenario has added further risks to Chinese economic activity.

However, recent developments have improved the outlook for the Chinese economy. Based on this new data, we will update our view of China and its possible impacts on commodities.

Country returns to inflation, but deflationary risk persists

China's CPI rose 0.7% YoY, breaking a four-month streak of declines. The reading was above market expectations of a 0.3% increase. On a monthly basis, the CPI rose 1.0%.

Slower deflation in food prices was the main factor behind the rise in the CPI. The fall in food prices slowed to -0.9% year-on-year, from -5.9% in January. Demand related to the Lunar New Year holiday probably gave these prices a boost.

Higher travel prices - probably driven by holiday demand - were another important reason. These prices rose 23.1% YoY, accelerating from the 1.8% increase recorded in January. Adverse weather, with freezing rain in central China in mid-February, also fueled upward pressure on food and travel prices.

Despite the positive result for economic activity, the factors that led to the end of deflation are temporary. The producer price index, which tends to be much less affected by the Lunar New Year holidays, fell by 2.7% YoY, more than the 2.5% drop in January. This was larger than the consensus estimate of a 2.5% drop.


Image 1: Consumer and Producer Price Indexes - China (%)

Source: National Bureau of Statistics of China

Growth target shows commitment to economic activity, but fiscal policy is challenging

Chinese Premier Li Qiang's first budget indicated a strong commitment to growth. The 5% target for 2024 sets a high bar, given a more challenging base than last year - and achieving it will require more stimulus.

However, the stronger than expected budget deficit is consistent with the ambitious target. The target is considerably higher than the consensus projection that the Chinese economy will expand by 4.5%. It is also higher than the potential growth for the year, estimated at 4.9%.

The government has set the broad fiscal budget deficit at 8.96 trillion yuan, or 6.6% of GDP. This includes a deficit of 4.06 trillion yuan (3.0% of GDP) in the general budget, 1 trillion yuan in special bond issues by the central government and 3.9 trillion yuan in special bonds by the local government. This figure is higher than last year's original budget deficit, which was set at 5.9%.

In 2023, local governments delayed spending, impacting growth. The risk is that this will happen again this year. Restrictions on the expansion of local government debt could prevent projects from being carried out, as the corresponding local resources are usually needed for large projects.

The strength of private sector confidence will also determine the effectiveness of fiscal policy. Unless there is a change in sentiment, private investment will be slow - and the government alone cannot generate a lasting recovery.




Image 2: GS Fiscal Stimulus Index - China

Source: Bloomberg

Image 3: GDP – China (%, YoY)

Source: Refinitiv

External sector has solid results, showing recovery ahead of 2023

Export growth accelerated to 7.1% year-on-year in January-February, compared to 2.3% in December, coming in above the consensus estimate (1.9%). The increase in export growth partly reflected the effects of the statistical base. In the same period last year, shipments fell by 8.4%, before recovering with growth of 10.9% in March.

Even so, the MoM downturn in exports - due to the Lunar New Year interruptions - was less than the typical seasonal drop. However, the first indicators of foreign demand point to a weak picture for the beginning of 2024.

Manufacturing PMIs from the US (ISM), the euro zone and Japan signaled deeper contractions in February, after brief recoveries in January. An indicator of new export orders in China's official manufacturing PMI also showed a deeper contraction in February.

Imports grew by 3.5% year-on-year in the two-month period, following a 0.2% increase in December, beating the consensus forecast (2.0%). Imports fell by 5.5% in 2023, although the last quarter was firmer, with an increase of 0.8%.

Import growth also benefited from more favorable base effects. More data is needed in the coming months to assess whether the recent stimulus is feeding the economy and increasing demand in a sustainable way.

Looking at grain demand, the data remains positive. Accumulated corn imports for the 23/24 harvest are at their highest levels in recent years, while data from Refinitiv shows that China's wheat imports in February reached their highest monthly level in five years.

However, demand for soybeans has not shown the same strength. China's soybean imports in January-February fell 8.8% YoY to 13.04M mt, according to preliminary data released by the country's General Administration of Customs (GACC). This is the lowest level seen for the period in five years.

Image 4: Exports and Imports - China (%, YoY)

Source: China Customs

In Summary

Recent data has brought more optimism about the Chinese economy. The country has left deflationary territory - at least for now. The government has set ambitious fiscal targets for 2024 and the first foreign trade results for the year were positive.

However, many of the challenges to China's economic growth remain, requiring a certain amount of caution - executing the fiscal deficit and restoring the confidence of the private sector are key to a sustainable change in the outlook for the Chinese economy.

Looking at the grain and oilseed markets, demand for corn and especially wheat continues to heat up while soybean imports have been falling amid higher stocks and slower crushing, following weak demand for meal.

Weekly Report — Macro

Written by Alef Dias
alef.dias@hedgepointglobal.com
Reviewed by Victor Arduin
victor.arduin@hedgepointglobal.com
www.hedgepointglobal.com

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