China's industrial production has returned to pre-pandemic levels, signaling potential inflationary pressures globally. Analyst Andreas Steno from Steno Research notes the build-up of momentum in China's economy, which could have significant implications for global markets.
The recent escalation in US-China trade tensions, marked by increased tariffs on various Chinese goods, is a strategic move by the Biden administration. These actions could provoke China to devalue the CNY, affecting global inflation dynamics. The EU, meanwhile, may face an influx of subsidized Chinese goods, potentially leading to disinflation in the Eurozone.
Chinese export prices have surged recently, unnoticed by many, posing a challenge to the US's easing plans. Steno highlights that China's strategic stockpiling of resources like iron ore, gold, and copper suggests preparations for a potential CNY devaluation or a major shift in global supply chains.
Copper prices have spiked, indicating a supply constraint and strong demand from China, contrary to claims of weak Chinese demand due to lack of construction. Steno points out that the market's price action contradicts these claims, suggesting underinvestment in China.
The rise in freight rates and export prices from China signals ongoing inflationary pressures. Steno warns that the narrative of Chinese goods deflation is outdated, as export prices have increased by 7.5% in the past quarter.
The strength of the CNY against currencies from the global south gives the PBoC flexibility to weaken the CNY in response to US tariffs. This move could benefit Chinese equities by improving margins without aggressive price hikes.
Steno's pollution-based indicator shows a rebound in Chinese industrial activity, reaching pre-pandemic levels. Despite this recovery, Chinese equities have not yet responded, potentially setting the stage for a significant rally.
India, having benefited from funds diverted from China, may face sell-offs if China's rebound continues. Steno emphasizes the inverse correlation between Chinese and Indian markets, highlighting the risks for India.
In summary, China's export of inflation through rising industrial activity and strategic stockpiling poses challenges for global markets, particularly in the US and EU. Steno's analysis suggests a need for close monitoring of these developments to understand their broader economic impacts.