Chart of the Week

CHINA’S DEFLATIONARY IMPULSE

China is the world’s second largest economy and remains a key influence on global trade so it continues to set the tone for global growth and inflation trends.

Right now, it is back to exporting deflation.

The chart below shows a recent collapse in Chinese M1 money growth (blue line) which, in turn, reflects the government’s ongoing clampdown on the property sector.

This is a complex indicator with many moving parts but, in simple terms, it reflects the amount of money washing around the economy. When the metric is rising, economic actors tend to have more money at hand and that usually results in stronger growth and higher inflation than would otherwise be the case.

The converse is also true.

When it’s in negative territory, like now, it suggests Chinese growth is weak and that usually results in a lower demand for goods and services, especially raw materials and other commodities.

Which is why the annual change in the WTI oil price (red line) has been so closely linked to Chinese M1 money growth over the past 20 years. And this helps to explain why resource markets are currently under pressure; the oil price has fallen from U$90/bl to U$70/bl over the past year.

Chinese demand (or lack thereof) remains a major influence on global commodity prices and, until domestic monetary conditions improve, inflation rates across the world are likely to remain contained.