China’s economy is suffering a second blow as the epidemic spreads globally. A few days ago, data released by the National Bureau of Statistics of the Communist Party of China (NBSC) showed that the manufacturing purchasing managers’ index PMI fell in April, indicating that China’s economic recovery was hampered, while the unemployment rate of young people in the mainland reached 13.6%, and to add insult to injury, inflation in the mainland is gradually getting fierce. The convergence of various factors has led some analysts to suggest that the Communist economy may be stagflationary.
So, is the Chinese economy experiencing stagflation? And in the case of stagflation, how to reverse it? Let’s talk about this topic today.
Stagflation is stagnant inflation (Stagflation). Under normal circumstances, when a recession occurs, unemployment increases, income decreases, consumption is suppressed, and prices continue to fall. But when stagflation occurs, the opposite is true, as prices continue to rise while the economy is in recession, creating a unique economic phenomenon of high inflation, high unemployment and low economic growth.
Both manufacturing and non-manufacturing PMIs in mainland China dropped in April
First, looking at the Purchasing Managers’ Index (PMI) released by the Communist Party of China for April, the official manufacturing Purchasing Managers’ Index (PMI), fell to 51.1 in April from 51.9 in March, a value that was not only lower than Reuters’ median estimate of 51.7, but also lower than the 51.6 expected by the Wall Street Journal and 51.8 expected by Bloomberg.
What is the Purchasing Managers’ Index (PMI)? This index is one of the internationally used leading indices to monitor macroeconomic trends, and has a relatively strong predictive and early warning effect, which can measure the status of the manufacturing industry in production, new orders, commodity prices, inventory, employees, order delivery, new export orders and imports. Purchasing managers’ index covers the fields of production and distribution, manufacturing and non-manufacturing.
Generally, the PMI uses 50 as the threshold for economic strength or weakness. When the PMI is above 50, it reflects the overall economic expansion; below 50, it reflects the overall economic contraction.
Although the official data from the Communist Party of China shows that the manufacturing PMI is above the critical point of 50 in April, enterprises are facing various pressures from rising raw materials, rising freight costs, chip shortages, etc.
The Chinese manufacturing PMI is calculated by weighting five indices: new orders index, production index, employees index, supplier delivery time index, and raw material inventory index. In the official data, these five indices have fallen compared to March.
To summarize, the official data released by the Communist Party of China points out five major problems in China’s manufacturing industry: supply and demand are both weakening, inventories of raw materials are declining, enterprises are employing fewer workers, and the delivery time of raw material suppliers is also increasing.
Serious Unemployment
Speaking of declining employment, let’s talk about China’s unemployment rate. Just last month, the National Bureau of Statistics of the Communist Party of China released China’s urban survey unemployment rate, and from January to March, the numbers were 5.4%, 5.5% and 5.3% respectively.
Although the figures look relatively stable, the Communist Party’s party media, People’s Daily Online, also believes that the pressure on total employment still exists. In the first quarter of this year, the number of laborers working outside the mainland’s rural areas was more than 170 million, a number that has decreased by a total of 2.46 million compared with the same period in 2019. It can also be seen that the number of migrant workers employed outside the country has not yet returned to the pre-epidemic level because the production and operation of part of the service industry, especially small and medium-sized enterprises, is facing more difficulties and the demand for labor is not high.
In addition, the survey unemployment rate of young people aged 16 to 24 was 13.6% in March, which also increased compared with the same period of the previous year, which also shows that it is more difficult for young people to be employed.
This data, too, brings into question the data on the mainland’s economic recovery. Previously, the CCP released GDP data for the first quarter of this year, showing that compared to 2019, GDP has grown by more than 10%, which means that the economy has recovered to the pre-epidemic level, i.e., in that case, the corresponding employment should also be back to the pre-epidemic level, or at least there is not such a big gap, but the data instead The data show that unemployment is rising.
An online article mentioned that at the end of June 2020, the National Development Institute of Peking University conducted an online survey of more than 6,000 people, and the data showed that the unemployment rate was as high as 15%, and 5% of the respondents were semi-unemployed. So, if there are nearly 800 million employed people in China, assuming the unemployment rate is 20%, then hundreds of millions of people will be unemployed.
But it should be noted that the survey unemployment rate data released by the National Bureau of Statistics of the Communist Party of China only covers the urban household population, but masks the unemployment situation in rural areas, since farmers are not considered unemployed as long as they farm. Last year’s graduation season, the CCP has been encouraging college graduates to “go to the countryside” and once they go to the countryside, they can be considered “fully employed”. The unemployment problem in mainland China is quite serious, judging from the CCP’s tactic of “going to the countryside” to trick urban college students into going to the countryside.
The serious unemployment problem will have an impact on the rebound of domestic demand, and many foreign media also believe that China’s economic boom is weakening. A day ago, the Wall Street Journal published an article titled “China’s economic recovery shows signs of slowdown”, which was preceded by a Reuters article saying that the pressure on China’s economy to slow down in the third quarter will increase amid pressure on external demand and still weak domestic demand. There are also comments that the Chinese economy is like a patient still recovering, but even if it gets better, it is definitely not in the same condition as before.
Rising Inflation
As we mentioned at the beginning, the CCP economy may be “stagflating” and another characteristic of “stagflation” is inflation, so to add insult to injury, inflation in China has been gaining momentum.
At the beginning of April, the Financial Stability Development Committee of the State Council held a meeting and mentioned that special attention should be paid to the price trend of commodities.
According to figures released by the Communist Party’s National Bureau of Statistics, in March this year, China’s consumer price index (CPI) rose 0.4% year-over-year; the industrial producer ex-factory price index (PPI) rose 1.6% sequentially and 4.4% year-over-year.
Corresponding to the data, from April 1, many industries in mainland China have seen a wave of price increases, including metal copper, aluminum, stainless steel, circuit boards, transportation costs, etc., which have seen an increase of more than 30%. Due to the price hike of raw materials, such as air conditioners, pumps, motors, compressors, these products, but also has long started a full line of price increases.
Before the land media also reported that the person in charge of a large multinational electronics company in Zhuhai said that from the third quarter of last year to the present, raw materials have had several price increases, by up to 40% or more. There is no doubt that this squeezes the profits of enterprises.
There is also the toy industry in Dongguan City, someone also told the media that the rise in raw materials has led to increased costs and reduced profits, but also affect the receipt of orders, because a rise in raw materials, along with the new offer of products are also raised, but not all customers can accept the increased prices.
In addition to raw materials, the global chip shortage is also a cause of price increases in several industries. As we mentioned in previous programs, the world is now facing one of the most serious chip crisis ever, Goldman Sachs analysis shows that as many as 169 industries around the world have been hit by the chip shortage to some extent, such as steel, concrete production, air conditioners, beer and even soap production have been affected.
In addition, there are rising freight costs and poor international logistics have also put a lot of upward pressure on business costs.
So what can the average citizen do if stagflation does occur? From general experience, it may be possible to start from several aspects.
First of all, there should be a certain amount of cash in hand, so that in response to various emergencies, it may be able to provide an additional layer of protection; then again, it may be possible to moderate reserves of some essential consumer goods, because under inflation, some shortage or essential commodities, prices may rise, such as food or medicine; and, because of the economic growth rate decline, you can consider moderate reduction of equity assets, and like Gold, foreign exchange and other assets that have a protective and defensive effect may be able to increase some holdings.
Stagflation is difficult to reverse
In economics, there are often two main reasons for stagflation. One is that when there are problems with supply that affect economic capacity, such as rising oil prices caused by the oil crisis, and the economy slows down when production costs rise and profits decrease for businesses, triggering higher prices. The other is due to inappropriate economic policies, such as excessive growth in the money supply and excessive government regulation of the market.
So this first scenario, let’s see, isn’t it very similar to the current economic situation in China that we just analyzed? And once you enter stagflation, it is very difficult to rely on a single monetary policy to turn the tide.
If you adopt a tight monetary policy, a higher interest rates, businesses and investors will have difficulty borrowing money, increasing the cost of doing business, the economy is likely to become more depressed, or even trigger a regression and other serious deflation. But on the contrary, if we adopt a loose monetary policy and lower interest rates, although we can stimulate economic growth, but the excessive amount of money will trigger hyperinflation.
If it comes to this dilemma, perhaps the CCP should expand public spending and cut taxes at the same time to gradually eliminate stagflation, but this approach will overdraw the spending of the next generation.
Recent Comments