Thinkpad: The China Factor

Happy Weekend.

We've spent a lot of time talking about the U.S. and the return of inflation. That remains an overarching theme. The story playing out in China is entirely different.

Zero tolerance to Covid and the strict lockdowns imposed in Shanghai have worsened fears of a slowdown in the world's second-largest economy. Bloomberg Economics this week pegged down the growth forecast for China to 2%. If the forecast comes true, China will grow less than the U.S. for the first time since 1976, Bloomberg wrote. Not everyone is as pessimistic and the median forecast for China's growth in 2022 is at 4%.

China is easing financing conditions to stem the bleed.

While the rest of the world is raising rates, Chinese banks cut key lending rates this week to support the economy. Bloomberg estimates that monetary and fiscal measures put together, to support the economy, add up to over $5 trillion. The currency, too, has been allowed to weaken over 6% from its peak in February.

But Jefferies' Chris Wood, writing in the latest 'Greed and Fear', expresses skepticism over the impact of these easing measures till China continues to follow the strict Covid-19 containment policies that it currently has. The data is reflecting the damage being enforced on the economy. Retail sales declined 11.1% year-on-year in April; industrial production declined by 2.9%; the urban unemployment rate rose from 5.8% in March to 6.1% in April.

Over in India, inflation chatter continues to dominate the headlines.

This week, we got the minutes of the emergency meeting of the Monetary Policy Committee. Members sounded rather panicky about the inflation situation. "Waiting for one month till the June MPC would mean losing that much time while war-related inflationary pressures accentuated. Further, it may necessitate a much stronger action in the June MPC which is avoidable," Governor Shaktikanta Das wrote while voting for a 40-basis-point increase in the repo rate.

Deputy Governor Michael Patra struck a (perhaps deceptively) calmer note reiterating that what they are doing is withdrawing the extraordinary accommodation. While inflation remains driven by insufficient supply rather than excess demand "central banks have no option but to front-load their actions, compress demand and render the recovery stillborn", said a seemingly pained deputy governor. He cautioned that, globally, stagflation is now increasingly looking like a base case scenario.

In the midst of what was probably a highly charged meeting, committee member Jayant Varma's trolling of the decision to cut rates by, not 25 and not 50, but 40 basis points brought some comic relief.

"Whatever symbolic or psychological benefit there may be from keeping the hike below 50 basis points is outweighed by the simplicity and clarity of moving in round multiples of 25 basis points," Varma wrote but said it wasn't worth a dissent as the optimal rate hike is not something that can be calculated with mathematical precision. As a kicker, he said, "I am thankful to the majority for not making my decision more difficult by choosing a 37.5-basis-point hike (exactly mid-way between 25 and 50)."

On a more serious note, Varma took the committee to task on the semantics over its stance (or non-stance) of "accommodative with a focus on withdrawal of accommodation". Noting that most analysts had misread the signals, Varma argued that the committee may need to consider rewording its resolution at the next meeting. "It would not be wise for the MPC to persist with language that is pedantically correct, but falls short in communicative efficacy." We couldn't agree more with the good professor.

Before we close, we leave you with a good read and a good watch.

Thinkpad has weighed in on the wheat ban. We've also weighed in on the shadow ban on crypto in India. Raghav Bahl sees a commonality in the approach here — ban if you do; ban if you don't. Read that piece here.

Spare an hour, also, for this conversation between Menaka Doshi and Deepak Parekh. They talk economy, the investor response to the merger between HDFC Bank and HDFC Ltd. and why he is best described as a salaried entrepreneur.

Till next week.