Delving Into China’s Latest Data Dump

After weeks of tariff talks and trade tensions, commentators we follow have expressed concern about the state of China’s economy. Yet, in our view, Beijing’s latest economic data release—covering the combined January – February period—showed an economy continuing to move past an early-2024 soft patch.^[i] Whilst some publications we follow found nuggets they claimed illustrated persistent worries, overall, we think these data point to a healthier-than-perceived Chinese economy that likely continues contributing to global economic growth.

Early-year China data can be a bit tricky because the Lunar New Year is a week-long holiday that shifts between January and February. Sometimes in one, sometimes the other, sometimes straddling them. In addition to skewing month-on-month readings, this can also skew year-on-year readings if the holiday is in January one year and February the next. So, to account for this, China’s national statistics agency combines January and February data into one reading, which it frequently compares with the same two months a year ago. This solution is unique to China, which doesn’t have a robust or mature set of seasonally adjusted data, and it can help investors see through holiday distortions.

CPI Stumbled, Spurring Deflation Worries

Inflation data are a prime example, in our view, as big monthly swings netted out to China’s headline consumer price index (CPI, a government-produced index tracking prices of commonly consumed goods and services) falling just -0.1% y/y in the January – February period.^[ii] Whilst this largely extends a yearlong trend of flattish prices, it was also the first negative reading in some time, leading some commentators we follow to argue Chinese deflation is at hand.^[iii] But prices weren’t down across the board, as seen in core CPI’s (excluding food and energy prices) 0.3% y/y rise over the same stretch.^[iv] Food prices were the main detractor, as prices for fresh vegetables, grain and fruits fell -5.5% y/y, -1.4% and -0.6%, respectively—though pork prices rose 8.8% off 2024’s low base.^[v] Outside of this, transportation, communication and daily services prices also fell, whilst prices for clothing, housing, education, culture and recreation, health care and other services all rose.^[vi]

Based on our research, it is normal at any time for some prices to rise and others to fall. That isn’t deflation. True deflation is just the opposite of inflation: Where economic research demonstrates inflation is too much money chasing too few goods and services, driving prices up economywide, deflation is too little money chasing too many goods and services, leading to broad price declines across the entire economy. In our view, overall mixed price movements that net out to the slightest possible decline don’t qualify. To us, those are just data volatility that may reflect oversupply in one isolated corner of the economy.

Still, commentators we follow warned CPI’s stumble could signal a nascent deflationary spiral, with consumption set to plummet. Coverage we saw suggested today’s falling prices incentivise people to delay spending in anticipation of lower prices tomorrow, thus dragging on consumption, which sends prices lower, and so on. Again, this isn’t how deflation works, in our view. If it were, deflation would never have ended after the Great Depression or after Japan’s long deflationary spell.^[vii] Rather, both ended as money supply growth recovered.^[viii] Consider: China headline CPI’s dip into the red in early 2024 precluded 12 straight months of positive readings.^[ix] There was no spiral.

Nor does Chinese money supply growth point to broad deflation, in our view. China M2 grew 7.0% y/y in both January and February this year, slowing slightly from October 2024’s 7.4% but still above last summer’s rates.^[x] Our research finds money supply growth exceeding GDP growth generally supports modest inflation. There are exceptions, but we wouldn’t read into them. In January 2008, China’s M2 growth slowed from 18.9% y/y to 14.8% in November that year.^[xi] CPI spent much of 2009 in the red, but deflation at that time was also occurring in the developed world—a lagging global financial crisis symptom, according to our research.^[xii] More recently, M2 growth’s slowing from February 2023’s 12.9% y/y to 10.3% in October 2023 preceded four consecutive months of negative CPI.^[xiii] But even then, deflation didn’t span the broad economy—falling energy and pork prices dragged down headline gauges.^[xiv] And neither were the widely dreaded deflationary spiral.

Inside Retail Sales’ Broad Growth

Elsewhere, retail sales rose 4.0% y/y, meeting analysts’ expectations and accelerating from December’s 3.7%.^[xv] This extends a recovery from early- to mid-2024’s anemic growth rates, a sign Chinese officials’ endeavours to support economic growth last year could be providing a tailwind, in our view. Digging into the data, growth was broad-based as both reporting areas (urban and rural) and all categories rose.[xvi] Some commentators we follow called the pop a figment of the government’s program to trade-in and trade-up household appliances or other devices. Perhaps that does affect some goods spending, but services sales—around 46% of all spending—rose 4.9% y/y, highlighting broadly solid demand.^[xvii] That doesn’t fit the overarching narrative we observed.

Other coverage we read couched these data as a positive sign for Chinese officials’ ongoing consumption boosting efforts, more of which are evidently in store. The latest, introduced Monday, will seek to promote wage growth and reduce financial burdens.^[xviii] The devil is in the details, but we find it noteworthy that last year’s efforts are seemingly bearing fruit, however incremental they were. We also find it encouraging that officials appear to be once again backing away from the old playbook of trying to spur growth via infrastructure and manufacturing and instead returning their focus to encouraging domestic demand. It remains to be seen if the proposed incentives will work to raise wages, though. Some of the plan looks more like an expanded social safety net to us.

We think it is notable, though, that several publications we follow remained pessimistic on China’s prospects, with many suggesting the plan isn’t sufficient to mend the country’s supposed economic woes. Yet, in our view, these data point to better-than-feared broad consumer demand, highlighting a sizable gap between expectations and reality.

Divergent Industry Data

At the industry level, manufacturing impressed whilst services slowed. Industrial production rose 5.9% y/y in the January – February period, outpacing analysts’ expectations but slowing from December’s 6.2%.^[xix] All three industry groups grew, with manufacturing’s 6.9% y/y growth leading the way. Technology products shone brightest, as production of electric vehicles, 3D printers and industrial robots grew most.^[xx]

As has been the case for weeks, most coverage we saw linked the rise to American companies’ front-running US President Donald Trump’s tariffs. That could well be, and if so, it could detract from springtime data. But our research finds such dislocations tend to be temporary, and Chinese producers are adept at navigating tariffs. Regardless, January – February’s jump is largely in line with prepandemic growth rates.^[xxi] There isn’t some massive skew jumping out at us.

Meanwhile, China’s Index of Services Production slowed to 5.6% y/y from December’s 6.5%.^[xxii] Whilst slower than December, the latest reading represents an improvement from more sluggish growth seen earlier in 2024—echoing retail sales and adding further fruit to last year’s policy push.^[xxiii] It also isn’t far off prepandemic rates, consistent with China’s long-running gradual slowdown.^[xxiv]

All in all, this struck us as a decent report that tacks onto China’s better-than-feared economic narrative. Not perfect, in our view, but many of the positive trends we saw at 2024’s end have marched on. Whilst surrounding sentiment appears set in concrete, we doubt that will prevent the world’s second-largest economy from contributing to global economic growth, an underappreciated source of demand and activity, in our view.^[xxv]