China will release a bit of economic data on Sunday that could be crucial to understand the country’s policies which have an impact on major commodity currencies. The iron ore market that is crucial for Australia has seen fluctuations recently, and Chinese stimulus is an important factor for supporting the AUDUSD. The yen and CAD could also be affected by measures implemented by the National People’s Congress (NPC) which continues to session into next week.
Normally, traders pay close attention to inflation numbers to get some insight into what the central bank will do. But with China’s control on the exchange rate, its inflation numbers provide a better reflection of the country’s economic policies. With Beijing embarking on an extensive stimulus program to boost its domestic economy, inflation could be particularly crucial at this juncture.
Room to Keep Spending
Normally, increased China’s government spending translates into an expanded monetary base, and higher inflation. That has been the theme for most Western countries in the post-pandemic era. Major central banks are still in the process of bringing down interest rates that they were forced to hike in order to deal with pandemic spending induced inflation.
China has had the opposite problem, and has been fighting deflationary pressures for the last couple of years. Following the collapse of the housing market in China, consumers became very concerned about future economic prospects and have been reluctant to spend money. This slowing in domestic demand has weighed on the country’s economic growth.
Placing Limits on Support
On the one hand, this means that China’s government has “room” to increase spending without blowing out inflation, something Finance Minister Lan Fo’an pointed out on Thursday. Saying this in the context of the NPC meeting is seen as messaging the deliberative body to be generous with its stimulus spending plans.
On the other hand, if inflation does start to pick up, then it could provide a “ceiling” to stimulus plans. One of the crucial elements that investors are waiting for is an expectation of what amounts to a cut in the central bank’s interest rates (the PBOC RRR cut), often seen as a pro-inflationary move. So, if CPI in China starts creeping up, investors might become concerned that the “big guns” of stimulus might not materialize, or will be smaller. This could end up hurting the Aussie.
The Data to Look Out for
Last month, China saw a bump higher in its inflation rate, which coincided with increased spending due to the Lunar New Year. That bump is expected to come back down in February, and leave that “room” for further stimulus. But if inflation were to be well above expectations, it could open questions about the magnitude of China’s governmt support for the economy.
The consensus is for China February CPI to come down to 0.5% from 0.7% prior, with the annual rate moving back to 0.1% from 0.5% prior. As a sign of continued deflationary pressure, annual PPI is expected to remain negative, but at -2.0% compared to -2.3% prior.
