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Chinese Inflation is Up Next

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With the large amount of stimulus that the Chinese government has been putting into the economy, we ought to expect some impact on the inflation rate.

So analysts are going to be keen to see what happens with the upcoming data. Also, as the yuan weakens from concerns over the trade negotiations, it makes imported products more expensive.

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Therefore, a negative CPI would be a poor sign of Chinese growth. It would also signal the need for more measures to prop up the economy from the central government. This would put even more downward pressure on the currency. That being said, it would help others that are dependant on China for exports.

What We’re Looking For

In a data-laden week, CPI is the only major economic event we expect out of China. The data will be coming out tonight at 03:30 CET (the day before at 21:30 EST.) The consensus among analysts is that the monthly inflation figure will drop to -0.6% from -0.4%, a result that would further frustrate Chinese policymakers.

On an annualized basis, however, the situation is a little better. Analysts expect a result of 2.5% compared to 2.3% prior. This would put it in range of the PBOC target.

The thinking here is that maybe authorities will consider that as long as the annualized rate stays up, the economy can bear a short-term period of deflation.

It’s the Economy

At the beginning of the week, the PBOC relaxed its reserve requirement (the “triple R cut”) for small and medium banks. They expect that this will make more cash available to businesses.

The action was already telegraphed a few months ago. However, back then it was seen as a response to President Trump’s tweets on trade, and an attempt to staunch a negative reaction in the markets.

Smaller businesses seem to be doing well. Not overly well, but at least above expectations as measured in the Caixin PMI released last week. This is important because they account for most of the hiring in China. And this is vital to maintain a vibrant domestic economy.

How much of the making available of credit actually gets to the market, however, remains to be seen. And that’s why we should keep an eye on New Loans data scheduled for release on Saturday.

Trying to Keep it Together

On the one hand, China is announcing continued investment to spur growth, with an eye towards Europe.

Last week, the government concluded a series of meetings and events with the interest of further boosting the Belt and Road project. The project is strategically designed to help turn the economy more domestic.

Additionally, Europe is China’s second largest market. And it’s having issues of its own. Trade talks seemed to falter over the weekend, with Trump’s tweets seen as a response to a hardening of posture and “slow walking” on the Chinese side.

As we discussed previously, the Chinese are well aware that the Trump administration is more vulnerable to political costs as the trade dispute drags on. With US indices hitting new record highs, it was a propitious moment for Trump to try speed things up.

The Markets

American negotiators had been talking as if this were the last round of talks. Some even expressed confidence that they could reach a deal in May. However, their Chinese counterparts have been downplaying the potential for a resolution.

The Xi administration is in a better political position for a protracted trade dispute. But with CPI data showing a lack of consumer demand, further cuts to economic outlook might be in store.

And that wouldn’t bode well for CNY strength. Nor, indeed, the strength of currencies from countries whose primary customer is China.

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