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Exporter of Inflation: Could China be an Inflationary Force Now?

Exporter of Inflation
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EDITOR NOTE: Apparently, there’s a debate going on as to whether China will soon become an exporter of inflation or deflation. If this doesn’t make sense to you, the main concern is whether China will transfer its increased production costs over to the importing consumer, just like some domestic businesses have done when rising costs have taken a chunk out of their bottom line. The truth is that it’s hard to say. The debate concerns a floating battlefield--a metaphor for FX strategy. Like any business, China certainly doesn’t want to see its cost of production eat up profit margins. At the same time, China still has to remain competitive as an exporter of manufactured goods. If China can produce goods more efficiently than its competitors, and if it can sell its products more cheaply despite relative price increases, then it can still undercut its rivals. It’s pretty straightforward. More goods for lower costs boosts the standard of living. And the author is right to point out that such a principle is the exact opposite of what the Federal Reserve is trying to accomplish.

I present two views and take a side. Michael Pettis chimes in as well.

Is China an Inflationary Force Now?

Financial Times writer Robert Armstrong asks: Is China an inflationary force now? His article Inflation, Made in China implies yes, but Armstrong presents two points of view.

Diana Choyleva of Enodo Economics argues the inflation side. 

Choyleva notes price pressure fueled by a 9% rise in the Chinese Producer Price Index (PPI). 

She says that Chinese exporters will have to raise prices to protect profits because the government is providing less support. 

Larry Hu of Macquarie is on the deflation side. He believes most of the PPI increase is tied to the price of oil and that a higher PPI has not historically led to a rise in export prices.

Michael Pettis Weighs In

  1. Rob Armstrong (@rbrtrmstrng) has an interesting piece on arguments in favor and against whether the China-as-deflation-exporter story is over. Count me on the latter side. 
  2. I think changes are indeed occurring in the structure of the Chinese economy that will eventually reduce its current account surplus, but these changes are occurring so slowly that it will be many years before China can become an exporter of inflation. 
  3. For now the combination of repressed wages (i.e. much lower wages relative to productivity than any of its trading partners) and a large (and still growing) share of global trade means that it will continue to put downward pressure on global demand relative to global supply.

Here is the Tweet Chain.

Strongly Side with Pettis and Hu

US manufacturers, German manufacturers, and global manufacturers in general all have the same oil and commodity price pressures.

If there is price pressure due to oil, it's across the board. Even if Chinese exporters hike prices a bit they still undercut what prices would be if manufacturing returned to the US.

There is no strong reason to believe Chinese companies will stop undercutting everyone else. 

What About Shein? 

Chinese apparel manufacturer Shein (pronounced she-in) takes clothes from design to shipment in just 10 days. The fashion wear is amazingly cheap and generation Z loves it.

It's not just the price pressure that's deflationary. Getting a new clothes design out in 10 days is an amazing productivity achievement. One can come up with a design, order a couple hundred items, and if they don't sell, well, so what? 

There's one more kicker. In response to Trump tariffs, China waived export taxes for direct-to-consumer companies. That's Shein's model and other companies are sure to follow.

For more discussion of Shein, please see Zoomers Flock to "She-In" for Amazingly Cheap, Real Time Clothes in 10 Days

More goods for less cost represents improved standards of living. This is what the Fed is foolishly fighting, blowing bubbles in the wake.

Covid did not stop productivity improvements in China or anywhere else. 

Original post from Mish Talk

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