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Case For Yuan Devaluation Grows As Chinese Factory Prices Fall Most In Six Years

On Saturday, we got what we called a stark "reminder of just who is lying hunched over, comatose in the driver's seat of global commerce" when China reported that exports fell 8.3% in July, far more than consensus and the most in four months. 

This, we argued, was further evidence that China will ultimately be forced to devalue, as collapsing global trade and weak domestic demand feed into each other, pinning the country’s export-led economy in slow gear. 

On Sunday, we got still more evidence of China’s economic malaise as producer prices plunged 5.4%, the largest Y/Y decline since 2009.

Here’s more from Reuters:

Producer prices in July hit their lowest point since late 2009, during the aftermath of the global financial crisis, and have been sliding continuously for more than three years.

 

"Policy focus is definitely the (producer) deflation at this stage," said Zhou Hao, economist at Commerzbank AG in Singapore.

 

He said China's central bank would likely need to further cut interest rates again, having already cut four times since November in the most aggressive easing in nearly seven years.

The gloom may only deepen in the coming week with a raft of economic data forecast to show renewed weakness in factories, investment and domestic spending.

 

The producer price index fell 5.4 percent from a year earlier, the National Statistics Bureau said on Sunday, compared with an expected 5.0 percent drop. It was the worst reading since October 2009 and the 40th straight month of price decline.

 

Falling producer prices are worrying because they eat into the profits of miners and manufacturers and raise the burden of their debts. China's corporate debt stands at 160 percent of gross domestic product, twice that of the United States, according to a Thomson Reuters study of over 1,400 firms.

In other words, an outright deflationary disaster that will serve to further imperil the financial condition of the country's manufacturers, in turn driving up NPLs which, as we saw last week, soared 35% in H1 (and that's coming from China's Banking Regulatory Commission which means that although the figures were from an internal meeting, they still likely reflect the triple- and quadruple-adjusted, "managed" bad loans data, as opposed to the real NPL ratio which is nearly impossible to determine given everything we disccused back in May).

Meanwhile, soaring pork prices (+17% last month) added 48 bps to the CPI, which came in at +1.6%.

And although Goldman notes that this could "potentially limit the extent of further policy loosening, especially interest rate policy," we doubt it will be enough to keep the PBoC from cutting both policy rates again this year and besides, Beijing could always just "adjust" the weightings if necessary.

Ultimately, rate cuts have so far proven to be woefully inadequate when it comes to rescuing the flagging economy, which is why it will be QE/devaluation or nothing, as Beijing will no longer be able to take the pain that accrues from staying on the sidelines in the ongoing global currency wars. 

On the bright side, China's "deficient" deflator tracks producer prices more closely than it should which means July's data might be a great excuse to overstate Q3 GDP.