Mikkel Rosenvold
3 weeks ago

Andreas Steno: Is China Exporting Inflation Again?

Analyst Andreas Steno discusses the resurgence of Chinese industrial production and its potential global inflationary impact. He examines the geopolitical and economic factors influencing this trend and its implications for global markets.
5 JULY 2017 - BERLIN: Xi Jinping - German Chancellor's Meeting with the Chinese State Representative, Federal Chancellery — Photo by 360ber
5 JULY 2017 - BERLIN: Xi Jinping - German Chancellor's Meeting with the Chinese State Representative, Federal Chancellery — Photo by 360ber

Chinese Industrial Production and Global Impact

Chinese industrial production has rebounded to pre-pandemic levels, with stock markets still lagging. This momentum could become self-fulfilling, says Steno. The US has increased tariffs on Chinese goods, sparking inflationary pressures in the US but disinflationary effects in the Eurozone due to increased imports of subsidized Chinese products.

Strategic Resource Accumulation

China has been strategically accumulating resources like iron ore, gold, and copper, anticipating potential devaluation of the CNY or a major overhaul of the electrical grid. Steno notes that China's stockpiling could lead to a significant lack of copper concentrate, driving up prices and causing market backwardation.

Commodity and Currency Dynamics

The strategic build-up of commodities, especially copper, might inflate global prices. The US might follow suit, diversifying its supply chains for critical technologies. Freight rates and Chinese export prices are rising again, reversing the goods deflation seen in late 2023. This indicates a likely continuation of export price increases through 2024.

Renminbi's Strength and Equity Markets

The CNY remains strong against global south currencies, giving the PBoC room to maneuver. Speculation on a weaker CNY has been bullish for Chinese equities, which have suffered from squeezed margins. A weaker CNY could help re-inflate margins without significant price hikes. Industrial activity indicators suggest a post-pandemic recovery, though official data might not fully reflect this.

Investment Implications

Steno predicts that a continued rally in Chinese assets could be met with skepticism, given the reduction in Chinese allocations by fund managers since the pandemic. A rebound in Chinese markets could negatively impact Indian equities, as funds shift back to China from India.

Conclusion

Steno highlights the potential for Chinese industrial momentum to impact global inflation and commodity prices significantly. Investors should watch for changes in Chinese export prices and strategic resource accumulations, as these will influence global market dynamics and investment strategies.

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