Global investors expect falling prices in China to push down inflation rates worldwide this year, as excess capacity in its slowing economy prompts Chinese exporters to cut prices on goods they sell abroad.
Prices of Chinese exports have been falling at their fastest
rate since the 2008 financial crisis, indicating the world’s largest exporter
is starting to send deflation outward to countries that have been battling high
inflation.
China will be exporting deflation to the rest of the world,
and you will find various countries dealing with the fact that China has built
up overcapacity,” said Chetan Sehgal, lead portfolio manager at Templeton
Emerging Markets Investment Trust, a UK-listed fund.
China’s consumer prices fell at the fastest annual rate in
15 years in January, losing 0.8 per cent, while the country’s producer price
index dropped 2.5 per cent year on year. Few economists expect developed
economies to record similar outright falls in prices, but many think Chinese
deflation could have a significant impact in emerging markets, particularly
those with major trading relationships with Beijing.
Citigroup analysts said this week that falling prices in
China could help to hasten moves by central banks in emerging markets to cut
interest rates this year, particularly in countries that consume relatively
large shares of Chinese goods.
“We as investors are only just starting to connect the dots”
on how falling prices imported from China might play out across markets, said
Luis Costa, global head of emerging markets sovereign debt strategy at
Citigroup. “The question is the magnitude.”
Low-cost Chinese-made goods have been a feature of global
trade since Beijing joined the WTO in 2001. But weak domestic demand as a
result of China’s prolonged property bust and a weaker renminbi are leading
investors to forecast that exports could be an especially powerful force this
year.
The prospect of China exporting deflation matters for
developing economies because “potentially, a big Chinese export boom in 2024
will lead to sustained demand for Latin American, African, Kazakh or Indonesian
commodities”, said Charles Robertson, head of macro strategy at FIM Partners.
“Chinese deflation in manufactured goods may still allow a little inflation in
commodities.”
Not all economists believe that deflationary forces coming
out of China will have a significant impact on global prices.
Helen Qiao and Miao Ouyang, Bank of America economists, said
that Chinese export prices would be unlikely to influence significantly
consumer prices in advanced economies.
“For the US, we estimate the share of Chinese imports in the
total US goods consumption is less than 5 per cent — and goods account
for approximately 40 per cent of the US CPI basket,” they said.
Stephen Stanley, chief US economist at Santander Bank, said
that any impact was likely to be small. “The biggest deflationary force in
goods prices here of late has been used vehicles, which has nothing to do with
China,” he said.
But some economists think that US imports from China are
being undercounted, which could make the impact on prices greater than it might
appear. In recent years for example, China’s trade data has been indicating
that it exports tens of billions dollars more than the US assesses it imports,
Brad Setser, a senior fellow at the Council on Foreign Relations, has noted.
At the same time, cheaper Chinese exports will intensify
complaints among western manufacturers about unfair competition. Chinese
exports still face obstacles this year because they are “vulnerable to greater
trade protectionism, with China’s recent gains in global market share starting
to face growing pushback overseas”, said Capital Economics analysts on
Thursday.
“The most obvious headline threat is to developed markets —
because China’s moving up the value-added curve into high-end manufacturing,”
said Robertson.
BYD, China’s biggest carmaker, recently announced price cuts
of between 5 and 15 per cent for its electric vehicles in Germany, after
Mercedes-Benz warned late last year that its profits were being hit by a
“brutal” price war in electric vehicles.
Nearly every other manufacturing company in Germany surveyed
by the Bundesbank in the past year relied on Chinese supplies for critical
intermediate inputs whether directly or indirectly, the central bank said in a
report last month.
“China spent 20 years destroying emerging-market competitors
in the manufacturing space, or at least squeezing them out of global
markets. Now it’s threatening to do the same to advanced economies’
manufacturers,” added Robertson.
The US and EU are facing a difficult choice, Setser said,
between policies to “de-risk” import reliance on China, and the economic forces
that are driving cheap Chinese supply. But “in much of the rest of the world,
the choice is simple”, he added. “If China is selling high quality — or
acceptable quality — products at low prices, they are going to buy them.”
0 comments:
Post a Comment