Happy Monday! You survived the weekend!

📝 Focus

• China: Old Before Rich?

📊 In the Markets

• TRY harder (₺)

• China Deflation

📖 MoneyFitt Explains

🎓️ Deflation worse than Inflation?

📝 Focus

China: Getting Old Before It Gets Rich?

In an FT article 3 weeks ago, Rockefeller chair Ruchir Sharma said Wall Street's bullish forecasts for China's reopening boom were unsupported by reality, with feeble corporate revenue growth in the first quarter of 1.5% and an 8% fall in April imports. May imports continued to fall, and last Friday, China reported consumer prices DOWN on the previous month for the 4th straight month with producer prices, which typically lead consumer prices, down by much more (see below.) He concludes that a "growth model dependent on stimulus and debt [i.e. China's since 2008] was always going to be unsustainable, and now it has run out of steam." As the Japanese stock market hits another 33-year high, many ask if China's DEFLATION🎓 will lead it into the deflationary lost decades Japan suffered after its 1980s boom-times... when what was then the world's second-largest economy was tipped to topple the US?

..... ▷ In the near term, the recent economic slowdown could well be due to a premature withdrawal of stimulus by Beijing after what looked like better-than-expected first-quarter growth, led by strong exports as supply chains reopened and backlogged orders shipped. If that was the case, fresh stimulus, given the lack of inflation and high youth unemployment, could help restart momentum in domestic growth, leading to a virtuous growth cycle of consumption, hiring and investment. Banks have already started lowering deposit rates, and incentives for EVs are being extended, both strong signals of intent.

..... ▷ Longer-term comparisons with Japan do look a bit more ominous, though. The Japanese economy had decades of economic stagnation after the bursting in the late 1980s of the asset price bubbles in stocks and property, which contributed to a massive banking crisis, which then led to years of feeble lending and persistent deflation. Between 1991 and 2000, the average annual GDP growth rate was only about 1%, as deflation eroded consumer confidence and discouraged spending. Unemployment more than doubled, and government debt ballooned as it tried (and failed) to spend the economy back to health. The benchmark TOPIX fell from its peak of 2,900 in 1989 to under 700 in 2012, 23 years later... and at Friday's 2,224, there's STILL almost a third to go before it regains that all-time high.

..... ▷ Another shared characteristic is a shrinking population. As Sharma also said, economic potential is a function of population (workforce) and productivity growth. Japan's population has been declining since 2010, with a low birth rate, an ageing population and limited immigration. Last year, China's population fell for the first time in 60 years ​​after a multi-year decline in its birth rate that experts now say is irreversible. It was a combination of the rocketing cost of living and childcare, massive gender imbalances, and changing societal norms after 36 years of the one-child policy brought in under Deng Xiaoping (and only replaced, many years after alarm bells sounded, with a two-child policy in 2016, and then a free-for-all in 2021.) China's total fertility rate (TFR) at 1.7 per woman remains well below the replacement rate of 2.1, which points to a declining population. Japan's is even lower at 1.3, while South Korea's at 0.9 is the lowest in the world. But unlike its rapidly ageing rivals, China potentially faces the prospect of becoming old before it gets rich.

The impact of a high elderly dependency ratio (the ratio of the population above a certain age to the working-age population) is the danger that economic output and tax revenue from relatively fewer workers may not support the needs of the elderly, leading to strain on social security systems, healthcare, and overall societal well-being.

(Incidentally, the most populous country in the world as of this year, India, is, at 2.2, surprisingly only a little above the replacement rate of 2.1. The global TFR is currently at 2.4, heavily driven by African nations.)

📊 In the Markets

TRY harder: Stocks in the US and Europe inched higher on Friday in subdued trading, with traders on the sidelines ahead of the Federal Reserve’s policy meeting this week. On the way, though, the S&P 500 reached a 10-month high in intraday trading, pushing further into its "bull market" (meaning a period in which asset prices typically go up, though it is nowadays only called a bull market AFTER it's already gone up 20% from the recent lows.) Tesla was a big driver on Friday with a 4% pop following GM’s Supercharger deal.

..... ▷ In Turkey, newly re-elected President Recep Tayyip Erdoğan appointed former Goldman Sachs banker and First Republic co-chief executive (she left in 2021) Hafize Gaye Erkan, as his 5th central bank head since 2019. The president has described (high) interest rates as the “mother and father of all evil.” Though "rational" or conventional policies that the incoming finance minister is promising suggest much higher interest rates to combat runaway inflation, the Turkish Lira, or TRY, extended its fall to record lows. The 10-year-old symbol of the TRY, the ₺, is supposed to look like an anchor, representing a safe harbour, strength and confidence. Five years ago, ₺1 could buy you US$0.21. Today it barely gets you US$0.04, about an 80% slide. (Annual inflation in May is running at 40%, down from 44% in April, and is the lowest rate since December 2021.)

China Deflation: Investors were happy with China's May inflation, with consumer prices up 0.2% compared to a year ago and producer prices down 4.6%, marking the steepest drop since May 2016. Compared to prices the month before, they were DOWN 0.2% and 0.9% respectively. That's deflation🎓, which is bad… but expectations of loads more stimulus from Beijing led Mainland China’s stock indexes up about 0.6%.

..... ▷ Producer prices, which typically lead consumer prices, saw the steepest year-on-year drop in seven years and followed April's decline of 3.6% — in stark contrast to still high inflation in other major economies. The data is just the latest indicator that points to a cooling China and after the release, the onshore Chinese yuan (CNY, see below) weakened against the US Dollar. China’s National Bureau of Statistics attributed the poor numbers, led by the mining and raw material industries, to the general weakness seen in global commodity prices and overall demand. (Last week, Canada and Australia, both major exporters of commodities that China typically consumes, unexpectedly raised interest rates thanks to strong domestic consumer spending.)

The Onshore and Offshore Chinese Yuan - a mini-Explainer

- 1) Onshore Chinese yuan (CNY) refers to the currency traded within mainland China, subject to the regulations and policies set by the People's Bank of China. Offshore Chinese yuan (CNH) refers to the currency traded outside mainland China, primarily in Hong Kong and other offshore markets.

- 2) The exchange rate between CNY and CNH can exhibit slight variations due to different market forces and regulatory conditions. CNH is typically more influenced by international market factors and supply-demand dynamics.

- 3) CNH provides greater flexibility for foreign investors to access and trade the Chinese yuan, while CNY transactions are subject to stricter capital controls and regulatory restrictions within mainland China.

- Also… The word “renminbi” (RMB) is used interchangeably with “yuan” (CNY) and translates to “the people’s currency” in English.