Hong Hao: Clean Plate Campaign Reflects China’s Rising Food Inflation Pressure
Hong Hao is managing director and head of research at BOCOM International, a subsidiary of Bank of Communications.
China’s food inflation has remained above 10% for 12 months. Almost overnight, the new emphasis on not wasting food swept through the country. Amid the rolling news coverage, multiple entities sprang into action to respond. Among the more memorable tactics, some restaurants have started requiring customers to order food according to their body weight, and others have initiated a policy of “N-2” — with N being the number of diners. There are even calls to stop the production of “maotai” as the production of the beloved and world-renowned rice liquor requires a lot of grain.
However, if we look at the cumulative agricultural output value this year, it was indeed more than normal in June. The unit yield of the summer grain harvest is at its highest on record. Of course, there are lags in reporting these data, and the impact of the severe flood has not been reflected in the June data.
Meanwhile, demand is subdued. The latest data show that the urban unemployment rate remains elevated at 5.7%, and the average for 31 major cities is at 5.8%. The unemployment rate among people with at least a college degree is actually 19.3%, and it has been rising — from 15.5% in April and 17.2% in May. Of course, this number includes new graduates and has often been elevated in the month after graduation. But there is a notable increase this year. Disposable income growth is still negative, and so is retail sales growth, which is well below expectations.
In summary, the inflation pressure on food is not demand-driven, but rather is related to supply constraints. Because weather is difficult to predict, and pork imports seem to have stalled, it is safe to assume that food inflation pressure is likely to persist in the near future. As such, conservative Chinese wisdom would call for food conservation.
Meanwhile, for monetary policy to support the economic recovery, it has to tolerate temporarily higher inflation. As the rivalry between China and the U.S. continues to escalate, it pays to retain some leeway for stimulus should risks continue to rise. It is not surprising that recent official speeches have to emphasize latent risks, especially from overseas.
The emphasis has a point. We have examined the relationship between China’s excess food inflation pressure versus the U.S. long bond yield in recent years, and found a close correlation. China’s excess food inflation, as measured by China’s food consumer price index (CPI) minus nonfood CPI, is at a level similar to early 2008, the onset of the global financial crisis and an episode of heightened global inflation until mid-2008. As such, China’s elevated excess food inflation bodes ill for the near-term U.S. long bond price. The U.S. long bond price has arrived at a short-term peak, and is waning and set to reverse together with spot gold in the near term. This is consistent with our observation that traders are reducing their extreme gold net long positions based on the U.S. Commodity Futures Trading Commission data two weeks ago. Indeed, gold started to correct last week.
A reversal of downward momentum on the U.S. long bond yield also hint at the U.S. rally is entering its late stage. A sudden collapse in the momentum of the U.S. stock market, while it is very difficult to time now and is altering the historical relationship of almost all market-timing factor models, will spell trouble again for the global markets — as it did in March. The fact that such momentum reversal is now hard to time by those quantitative models we used to depend upon so much is a warning of the unprecedented market conditions we are trading in.
The point gain in the S&P 500 index appears excessive, and we are almost at the level of late January 2018 and late December 2019. Both episodes were at the late stage of the stock market rallies at the time and were and followed by epic market volatility. Chinese believe in “preparing for rainy days,” and the market should heed this wisdom of thousands of years.
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