China FX Pass-Through Conundrum
In year-over-year terms, Chinese CPI fell 0.5% in November. That's the first fall in 11 years and it was much softer than the flat reading expected. A big reason for the miss was food prices, which fell 2.0% in large part due to a fall in pork prices but even without food, CPI would have been down 0.1%.
The miss highlights some lingering questions about the Chinese and global economies. Despite its rapid handling of the virus, the Chinese consumer is struggling. Through October, Chinese retail sales are down 5.9% year-to-date compared to 2019.
The broader economy is strong but that's mainly owing to vast government investments.
One line of thinking is that the Chinese consumer simply retrenches in times of uncertainty. That may be the case but it may also be a sign that the global consumer might not be as strong in the post-covid era as anticipated.
An alternate thought is that China may be on the leading edge of the post-covid economies in potential currency pass-throughs. Large importing economies such as China with strengthening currencies tend to import disinflation, which may feed through capped commodity prices. The Chinese yuan on Wednesday rose to the best levels against the US dollar since June 2018. How the export-sensitive economy responds to the strengthening currency may be an early warning sign for others, particularly Germany.For now though the focus will be on Boris Johnson's trip to Brussels. Negotiations are in the end-game and Johnson has played his usual game of brinksmanship. It's worked before and a deal is in everyone's interest at a delicate time in the global economy but there is always the risk that he's pushed too much.
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