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Watching the Wrong Numbers on "China Deflation"
Everyone wants to talk about Chinese deflation because of falling producer prices at home, burgeoning industrial excess capacity and a "glut" of exports going abroad.
However, they are looking in the wrong place. Chinese PPI is a red herring, highly volatile and driven much more by global oil prices than supply/demand conditions at home ... and there is no industrial excess capacity or Chinese export glut in the macro data.
If you want to see the real "deflationary" problem with China you need to look elsewhere. At home, the most urgent issue is the collapse of the property market, leading to falling asset prices, massive losses and retrenchment in the real estate economy, and a dramatic drop in growth relative to interest rates. On the external front, the problem is not that China is selling more goods to the rest of the world but rather that it is buying less, with a sharp decline in relative import demand in recent years. These are the trends that really matter for investors.
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