What China's deflation could mean for the global economy

well China saw both consumer and producer prices fall in July it's the latest red flag as the world's second largest economy struggles against slumping domestic demand could cheaper China prices help the U.S and other world economies in their fight against inflation or is China's deflation in for a reversal in the months ahead with more we're joined Now by Ben Emmons who is head of fixed income and macro and Cedar portfolio manager at New Edge wealth this is something I have been struggling to understand in full transparency you know how much should we weight the deflation that is happening in China if you go pre-crisis or even pre-financial crisis it mattered a lot because China was producing all these really cheap Goods that we imported and that put pressure on our wholesale prices and consumer prices but that's somewhat reversed now even pre-pandemic but mostly after the pandemic so if shifted away the supply chain to an extent we're not while we're importing but not as much anymore than we used to and so this deflation that you're seeing today really driven by pork prices and transportation costs that's most of it it's just very domestically generated and I drilled in the pork price Dynamic of China this morning and I know that that's actually the government is taking some action there to try to tighten up pork supplies so I think this deflation that you're seeing in in CPI is probably miles may stay you know somewhat there but reverse and I think therefore the impact that it will have in other economies is limited yeah we're showing your pork price uh chart right there I just hadn't highlighted because I I love that one I think it's very interesting what you're talking about with them trying to bring those prices down yeah we started in your note this morning too even as you were laying it out there a moment ago you also noted as well that there's a second batch of central pork Reserve collections to stabilize prices uh that that's coming about but you also mentioned in the note that the entire world doesn't revolve around Chinese pork purchases so where else should we be keeping a close eye on especially within the second largest economy right now to really monitor where those signs of weakness are persisting or where on the other side for companies that are looking for any kind of sign of of strength within that economy where would you be keeping an eye on yeah you look first at foreign direct Investments because that's I think key so China has been really opening that Gateway up again but we know how they operate right they they don't let everything come in at the same time and they restrain Capital to an extent for being you know exported out again once you have invested there but I think that's a key part because you get the opportunity to invest in China it is the biggest consumer market so as much as the pandemic as an after fact which is a study out that there's long covered in China that's actually depressing to an extent consumer demand you know in the end of the day that I think a lot of U.S and other companies will be willing to expand their operations there if they if they are allowed to now we do know from this from the uh Administration the other day they put it specifically on semiconductors and new policy out that they want to restrained as but I think if you otherwise think of a Tesla or apple or any of the ge's other companies you know China opening up its borders that's the big deal I think that's what we want to watch yeah and we're also there's some reporting this morning some new reporting that there could be a curb from the U.S on certain types of venture capital and private Equity investments in China as well um so I I am curious you know yes there's a lot of U.S companies who do a lot of business in China but by and large the U.S Equity Market writ large seems less concerned about the China slowdown overall is that the correct reaction is that our U.S investors sort of paying less attention to China at their Barrel so we came into the year there was a lot of Hope about this is the China reopening so it's going to have a big macro story and my view it's still there like it's it's actually just slower reopening a slower effect and that's maybe where the decoupling has taken place over the last number of months as the AI narrative really hyped up in markets and people don't look at China so much in an AI context just yet even though they're a huge competitor as we know which is more focused here on domestic companies repositioning itself for the AI hype and it's spending there and our domestic economy is just being thriving on that we had a moderation of to some extent inflation that's booster real incomes so I think that is really where that decoupling between U.S markets and China markets is for now so it leads you to the point of that let's say this reopening actually becomes a bit more surprising in the second half or the first quarter of next year I think that we can conclude that China reopening last year in the fall is starting that that probably has affected Europe and the U.S economy staying out of this presumptive recession because let's face it the trade between U.S and China is huge as well as Europe I think that has kept the situation sort of together but the financial markets have judged like well this is a slow motion process so let's focus on other things I think that's why you see the company in other words sorry just to follow on that so you think that when we do get more more to the conclusion of that reopening process it could provide some further upside I think it is and I think that as I said like the the reopening one hand of foreign direct investment into China that would affect the stock market here obviously because you know we know this is a huge area where you can generate significant chills simple statistic I know from from Apple is that I think that generate over 300 billion in sales in China so if they can boost that which the sales numbers have been sagging and it would be an impact on our market so I've given Apple's related Market on the other hand it's also about China's own reopening in terms of outward like as in they have looked at Investments outward there was a policy statement out the other day of trying to put more money into outward Investments which I think means investing in other real estate or property or or companies and it's also this tourism wave that's sort of my own personal view I it's interesting how Vietnam has had a record inflow of Chinese tourism just coming through now that's the latest statistic we haven't seen China tourism pick up so much just yet I think that's another sort of let's say reopening tale that we're going to deal with coming from China and so we we've been in such a kind of de-globalized environment for the past few years now as we think about the ties and some of those separatized between U.S and China on the trade front that has caused officials to have to come back to the table and try to get new deals done but in the interim period now you've got the reopening can can a reopening in China Drive re-globalization in the next year two years and what does that look like for people who are waking up this morning hearing us talk about this in the a block of this show and trying to figure out what that means for their portfolio yeah and so the the regobilization would be fantastic but I think it's it's a bit of a difficult reality because just listen to the rhetoric coming out of the campaigns now former president Trump wants to raise even more tariffs on on China if he gets into office there's one example in the current Administration has maintained his policy that's been actually very much of a pillar of the quote-unquote decoupalization of decoupling of between us and China terms with trade and that is actually I think a key let's say geopolitical or political policy towards in order to see this regobilization really take place on the other hand look trade is trade so companies want to trade with China and as long as there's not as much as restriction on that then it will flow as China tries to further reopen its economy so I think you'll see some effect coming through in a number of quarters from you know an improvement of trade between China and U.S and Europe just from a flow perspective but long term if the entire stay in place or it becomes even more political as we're hearing then I'm not sure if the globalization is so easy to achieve

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Id: Rp957mVmHH4

Length: 8min 6sec (486 seconds)

Published: Wed Aug 09 2023