China Update

China Update, Emerging Markets, developments, Trump Administration, fx trader, forex

There have been several developments in China that may have been overshadowed by the US election. The US election itself is a mixed blessing for China. Trade and currency issues will likely prove more contentious. However, to the extent that a Trump Administration may pull back from its global engagement and leadership, there may be less confrontation over human rights and freedom of the press.

In terms of China's politics, an important development has been the suggestion by some high ranking officials that the age limit on Politburo members as set as it had seemed since former President Zemin first articulated it in 2002. This is important because next year, the key seven-member Standing Committee begins a new term. The "seven up, eight down" principle, which means someone 67 years old can be promoted but at the end of their term if they are 68 they must step down, could see five of the seven members replaced (all but President Xi and Premier Li).

This is important in its own right, but also as a precedent for Xi himself, who was recently recognized as "core" leader, something achieved since Deng Xiaoping. President Xi is widely understood to be consolidating power to a great extent. The softer age limit would potentially see Xi stay longer. Currently, it is not unusual in China for leaders to still wield influence even after they leave office.

Ahead of next year's National People's Congress, China's legislature, there are various ministerial changes. Among these, Finance Minister Lou Jiwei has been replaced. He was widely respected, and no new position for him was announced. His replacement is Xiao Jie, who previously worked with Premier Li. Xiao Jie reportedly will focus on three large issues: relations with the US, broadening local government revenue base, and address the real estate market. Xiao recommended increasing property taxes before 2013. This may come back to the fore.

China has also gotten involved in Hong Kong politics. The proximate issue is that two HK newly elected HK legislators refused to take a loyalty oath. China argues this prohibits them from serving. The two elected legislators advocated HK independence, which conflicts with the loyalty oath.

On Thursday, China reported inflation figures. October CPI was in line with expectations at 2.1%. It is the highest since April. The main culprit is food prices. They are up 3.7% year-over-year. Non-food prices are up 1.7%.  Another way to slice the data is to separate goods from services. Goods prices are up 1.9%, while service prices were up 2.5%.

Perhaps more importantly, producer prices are rising. In September they stopped falling for the first time since Q1 12 by posting a slight 0.1% increase. In October, producer prices were 1.2% above a year ago levels. The market had expected a smaller rise.  An interesting takeaway from the higher PPI is that it will likely boost nominal GDP in coming quarters.  More broadly, China joins the US, UK, and many countries in the continental Europe that have seen deflationary forces ebb.