China’s Soft ReopeningMay 11, 2023
China reported year-over-year inflation last night at just 0.1%, 0.2% lower than expectations. Clearly China’s reopening is not creating price pressures, which brings the strength of the reopening into some question.
Recently, we saw a fairly significant drop in China’s PMIs—all of them well below 50—indicating again a lack of economic strength.
We have found that copper is a pretty good leading indicator for China’s GDP, and the relationship is starting to fray. Just as copper prices signaled an upturn in China’s GDP last summer, it appears that copper is now telegraphing a slowdown in China’s GDP expectations for this year.
The decline in economic activity—as represented earlier by the weak PMIs—in conjunction with inflation undershooting and industrial commodity prices falling all seem to signal China’s economic activity is rebounding slower than many expected.
This is likely the cause for the decline in China Government Bonds recently. Both short and long rates have been falling since the beginning of March. These drops in rates add weight to the concern that China’s reopening is turning out to be much softer than many expected. Given the relationship between China’s CPI and US import prices, this also represents another tailwind to falling US inflation.