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China grapples with stagnant inflation as consumers remain cautious

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As China’s economy delivered its best performance since the coronavirus pandemic emerged, one metric has remained resolutely downbeat.

Industrial production has powered to its highest rate of growth in 2020, surpassing most of 2019. Consumption has recovered and exports are booming, rising by 21 per cent in November. But the same month, the country’s consumer price index fell into negative territory for the first time in over a decade.

The headline rate of minus 0.5 per cent was mainly driven by pork, a crucial component in the basket of goods and services used to determine the price level. Pork prices rose sharply last year as African swine fever swept through China’s herds, but have recently begun to decline, dragging overall price growth into negative territory.

But even when food and energy are stripped out, China’s core inflation has remained at 0.5 per cent for the past five months — its lowest level since 2010, and a puzzle given that China is experiencing the world’s most resilient rebound from the coronavirus pandemic.

The persistent weakness of Chinese prices indicates subdued household demand and poses a challenge for the People’s Bank of China as it tries to manage the recovery in other areas of the economy, analysts said.

“With this sort of strength of economic activity, there should be more price pressure,” said Dariusz Kowalczyk, an economist at Crédit Agricole, who pointed out that industry is growing faster than it was before the pandemic.

Line chart of Annual % change showing Chinese inflation points to sluggish consumer demand

Although retail sales have been growing year-on-year since August, rising by 5 per cent last month, the subdued inflation data suggest households have a limited appetite to spend. 

 “We think low inflation is not only because of low food and oil prices, but because there is still some weakness on the demand side,” said Jingyang Chen, an economist at HSBC. She added that China “is still in the middle of an uphill battle to achieve a full recovery in domestic demand”.

Unlike many western economies, China has taken limited measures to prop up household spending, and has instead focused on supply-side measures to boost its economy combined with a strict approach to virus prevention that limited new reported cases to a trickle.

“[The government] orchestrated and managed a rapid recovery of industrial production, and as a result we had this overhang of supply not matched by demand, so not surprisingly, prices have to be low,” Mr Kowalczyk said. 

There are some caveats to the price data. Interpretation is more difficult than usual because of changes in household behaviour during the pandemic, particularly regarding the basket of goods and services they consume. Spending on services such as travel and tourism has risen recently, for example, but remains depressed compared with last year.

And not all prices are weak.

China’s producer price index, which measures factory gate prices, has been in negative territory since February on an annual basis. But it rose month-on-month in November, suggesting the contraction is easing thanks to export growth, which relies on consumption in the west, where government support has been stronger.

China’s stock market has boomed this year and the prices of new homes have risen sharply. Concerns over leverage have already surfaced in the property sector, where the government has taken measures to constrain borrowing. These are beginning to have an effect: in November, new home prices rose 4 per cent year on year across major cities — the slowest rate in nearly four years. China’s CPI measure does not directly include house purchases but does partly incorporate the cost of renting.

Another bright spot is China’s improving labour market, which could help revive inflation in the coming months. In November, the unemployment rate fell to the same level it had been in December 2019, before the pandemic struck. That could drive a recovery in consumer confidence and consumption, supporting prices. 

But Ms Chen said income growth remained uneven: “A lot of people only focus on average disposable income growth in China, but if you take a look at migrant workers’ [income] growth they are still lagging behind.”

The country’s millions of migrant workers, who are not fully reflected in official unemployment data, were hit hard by travel restrictions and lockdown measures earlier this year.

Negative inflation exerts pressure on corporates and households by increasing real interest rates, as well as threatening to undermine profitability. And while many expect rate hikes to begin next year, some suggest that stagnating prices could put pressure on the PBoC to hold or even cut rates.

Haibin Zhu, chief China economist at JPMorgan, argued in a December report that “macro and inflation dynamics are pointing in different directions” and that the PBoC is likely to cut rates in 2021. He says that financial markets have focused “too much on the strong data”.

But the central bank would have to tread carefully in considering whether to loosen monetary policy in the midst of a strong recovery.

“Cutting the rates may send a misleading message of policy easing,” said Mr Zhu. “That’s something the PBoC doesn’t want to miscommunicate to the market.”

Additional reporting by Wang Xueqiao in Shanghai



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Pakistan’s prime minister survives confidence vote

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Pakistan’s prime minister survived a vote of confidence on Saturday after the shock defeat of his finance minister earlier in the week underscored the fragility of the ruling coalition.

Imran Khan took 178 of the 172 votes needed to win after the former cricket captain was forced to seek a vote to prove he had a majority to govern after his finance minister lost his senate seat in a tightly contested race.

The prime minister alleged that around 15 of his lawmakers had been “bought” to vote against Abdul Hafeez Shaikh, who led government negotiations with the IMF, after opposition-backed former prime minister Yusuf Raza Gilani took his Senate seat.

“Imran Khan is not going down in the near-term, but he stands politically weakened by the events of this week,” said Asfandyar Mir, a South-Asia analyst at Stanford University, “he will be playing defence from here on”.

Khan said after the vote he would continue to battle corruption and pledged the economy was on the right track. “We are on the way to economic recovery,” he said.

The vote of confidence was seen as a test of Khan’s popularity at a time the opposition is ramping up pressure on him.

The Pakistan Democratic Movement (PDM), a coalition of opposition parties including the Pakistan People’s Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N), has since late 2020 intensified its campaign for Khan’s removal by banding together and holding rallies across the country.

Leaders of the PDM have accused Khan and Khan’s Pakistan Tehreek-e-Insaf party (PTI) of securing its 2018 victory with the backing of the powerful military. Leaders of the PTI and the army deny the claim.

Analysts said that the vote was unlikely to end Khan’s problems. “Imran Khan remains the prime minister but his government’s agony is not about to end,” said Ayaz Amir, a former member of parliament and commentator. “Increasingly the initiative has gone to the hands of the opposition and Imran Khan is left to react.”

Khan’s election as prime minister was widely seen as marking a new chapter in Pakistan’s politics. His anti-corruption platform was popular among middle class and youth voters, who saw him as a break from politics dominated by the country’s wealthy elite.

But he has faced criticism for his failure to lift the economy — Pakistan is under a U$6bn IMF loan programme — and to deliver on his promise to create an Islamic welfare state.

“The poorer segment of Pakistan’s population have been hit the hardest. The prices of food items have risen sharply under this government and that’s a big issue for our people,” said Shaista Pervaiz Malik, an MP for the opposition PML-N.



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White House warns of ‘large number’ of victims in Microsoft hack

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The White House has warned that hackers may have compromised a “large number of victims” in the US by exploiting recently disclosed vulnerabilities in Microsoft software. 

Jen Psaki, White House press secretary, said on Friday that there was currently an “active threat” from hackers exploiting four flaws in Microsoft’s Exchange email application, which the tech group disclosed earlier this week. Microsoft has blamed a Chinese state-backed hacking group for the attacks.

“This is a significant vulnerability that could have far-reaching impacts,” Psaki said. “We are concerned that there are a large number of victims and are working with our partners to understand the scope.” 

Brian Krebs, a cyber security researcher, claimed in a blog post on Friday that at least 30,000 organisations “including a significant number of small businesses, towns, cities and local governments” had been hacked in the past few days following Microsoft’s disclosure, citing multiple sources briefed on the matter. 

On Tuesday, Microsoft published a blog post in which it said a group of hackers had launched “limited and targeted attacks” to gain access to emails. It also said the hackers had tried to go deeper into victims’ computer systems in order to lurk there unnoticed for a long period of time.

Microsoft has attributed the campaign to a group of Chinese state-sponsored hackers called Hafnium. China on Wednesday denied responsibility, according to a Reuters report. The White House did not link the campaign to any particular country.

It is unclear who has fallen victim to the attacks. Microsoft said that Hafnium has tended to target “infectious disease researchers, law firms, higher education institutions, defence contractors, policy think tanks, and NGOs” in the past.

Late on Thursday, Jake Sullivan, National Security Adviser, said in a tweet that the White House was “tracking . . . reports of potential compromises of US think tanks and defence industrial base entities”. 

He and Psaki urged the government, private sector companies and academic institutions to patch their systems after Microsoft issued fixes for the vulnerabilities. 

The concerns come after revelations in December that a sprawling cyber espionage campaign, likely backed by Russia, had been targeting US government agencies and businesses unnoticed for at least a year.

Authorities are still struggling to understand the scope of the fallout from the SolarWinds hack, which has prompted calls for President Joe Biden to prioritise US cyber security. The Biden administration is now preparing sanctions and other executive orders in response to the hack. 

James Lewis, a cyber expert at the Center for Strategic and International Studies, said it appeared that Microsoft and the US government had uncovered the Chinese attack while “poking about looking for SolarWinds”.

“This is the downside of a big hack by somebody else as it increases the chance that you’ll be found out,” Lewis said. “The Chinese should send the Russians a bill.”



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Polish women count cost of tough abortion curbs

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Even before Poland all but outlawed abortion, Zofia has been thinking about moving abroad. But the near-ban that took effect earlier this year helped her make up her mind: this autumn she plans to move to Prague in the Czech Republic.

“I feel better there, freer, and being a woman there doesn’t make me feel weaker or worse,” she said. “I love my life in Warsaw. But when the [abortion ban was mooted], I thought, I don’t want to live here any more . . . And I don’t want my kids to live here.”

The 31-year-old artist is one of thousands of Polish women outraged by the tightening of the country’s abortion laws which, even before the overhaul, were among the strictest in the EU. Their anger centres on a ruling by the Constitutional Tribunal in October last year, which declared that a 1993 law allowing abortions in the case of severe foetal abnormalities was unconstitutional.

The ruling came into force in January, leaving only two grounds for an abortion in Poland: a threat to the mother’s health or if the pregnancy is a result of rape or incest. Such cases made up just 2.4 per cent of the 1,100 legal abortions in Poland in 2019.

Hundreds of thousands of Poles took to the streets when the ruling was announced in October, and activists have called for another round of protests on International Women’s Day this Monday. Polling suggests that a majority of Poles back some form of liberalisation.

Anti-abortion campaigners, often guided by their religion in what remains one of Europe’s most strongly Catholic countries, say the change was needed to protect the rights of unborn children.

“An unborn child is a separate person, which has its own body and its own rights. A child must not be deprived of the fundamental right of every human being — the right to life,” Kaja Godek, one of Poland’s most prominent anti-abortion campaigners, wrote on Facebook last month.

A pro-life poster in Krakow. Many Polish opponents of abortion are guided by faith in one of Europe’s most strongly Catholic countries
A pro-life poster in Krakow. Many Polish opponents of abortion are guided by religion in one of Europe’s most strongly Catholic countries © Omar Marques/Getty Images

But activists say the ruling will force women to give birth to babies with such severe abnormalities that they have no chance of survival. They also say the government has done too little to help the families of children born with disabilities, who receive only limited support.

“I’m terrified because for me as a woman in reproductive age, it means getting pregnant in Poland became dangerous. And I’m afraid for my sister, for my colleagues and friends, for my relatives and for many other women I meet every day as clients,” said Kamila Ferenc, a lawyer from the Federation for Women and Family Planning, a women’s rights group.

“They will be in a horrible position . . . they have lost the possibility to decide freely on their own, because it’s not so easy to have an abortion outside the system.”

In the past, Polish women who could afford it were able to seek abortions in neighbouring countries with more liberal laws, such as the Czech Republic or Slovakia. But with the pandemic limiting travel, experts say women are likely to turn to the internet to buy drugs from overseas that would allow them to carry out abortions at home. Women are not prosecuted for self-managed abortions carried out before the 22nd week of pregnancy.

“It used to be the case that illegal abortions were through surgical procedures by doctors and back-alley providers. Then abortion tourism rose in the early 2000s after Poland joined the EU. Now we are seeing an increase in self-managed abortions, which can be less of a financial and emotional burden,” said Maria Lewandowska, a researcher into reproductive health at the London School of Hygiene and Tropical Medicine.

Justyna Wydrzynska, from Abortion Dream Team, a group that helps women who want to terminate their pregnancies, said that since the abortion rules were tightened in January, the organisation had received three times the normal number of calls from women seeking help.

“We get around 600 to 700 phone calls a month. Around 100 of them need to go abroad [for an abortion], and for the rest, . . . these are mostly people in need of pills, assistance in taking pills or post-abortion care,” she said.

“Often they are human dramas. Some people approach it in a task-oriented way, others very emotionally. Sometimes it is very difficult.”

Despite the huge protests last year, women’s rights groups acknowledge that as long as Poland’s conservative-nationalist Law and Justice party remains in power, the prospect of the laws being loosened is minimal. But they hope that in the long run, the debate sparked by the ruling will lead to greater support for liberalisation.

“The factual situation of pregnant women is worse. But on the other hand I think we are now on a better track to change the situation than when [the previous government led by the centre-right] Civic Platform ruled and everybody thought everything was all right,” said Ferenc.

“There is more courage in society to speak about abortion. People educate themselves and each other. I think that we now have more solidarity and strength in society to fight for reproductive rights. ”



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