Deflation in China Clearly Seen, But Ignored

Markets run on psychology and most investors take their cues from the herd. When something bad happens and the market keeps rising, this is evidence that the bad thing is not important. When the market turns and heads lower, often a scapegoat is sought after, such as a fat fingered trader, malicious shorts, or some other nonsense. The source of the next crisis is a familiar one, and already in full bloom: credit inflation combined with malinvestment of said credit. China's investment binge from 2009 to 2013 added massive amounts of productive capacity, while the country failed to shutter excess production. Even today, excess capacity is being funded as a way to keep employment and GDP elevated.

FT: Emerging Asia: The ill wind of deflation
For these reasons, evidence of a deepening deflationary spiral in Asia — sparked by manufacturing overcapacity, an evaporation of trade demand and anaemic productivity — is a major cause for concern. That anxiety is amplified because of the structural nature of the problem. That it is taking place just as the EU and Japan are slipping back into deflation while the US is struggling with weak corporate earnings, makes Asia’s falling prices a pivotal issue.

“There is a chance that we are moving towards global deflation,” says Alberto Gallo, head of European macro credit research at RBS, the bank. “We have overleveraged everywhere and, instead of reducing capacity, we are creating a prolonged state of industrial overcapacity that is driving down prices. China is the biggest example.”

FT: Indebted Chinese maize processor taken over by Jilin province
It has been taken over by Modern Agricultural Industry Investment Ltd, which is ultimately owned by the Jilin Provincial government together with a city in the province also named Jilin. Over the past decade Jilin Province, China’s largest corn producing province, has encouraged the rapid development of companies that process corn into feed, starch, corn syrup and biofuels in order to create an industrial base for its predominantly rural economy.

WSJ: China’s Middle-Class Dreams in Peril
Zhao Cui’e, chief executive of Xinxiang City Dacrotized Metals Coating Co. says some state-owned home-appliance or auto-parts makers delay payment for up to 11 months after placing their orders. “What small company can afford to lay out millions of yuan to support these big companies,” said Ms. Zhao.

Meanwhile, Xinxiang’s aging factories for iron, steel and polyester fiber—the ones whose role is supposed to shrink under China’s new growth model—continue to pump out unwanted inventory with the help of cheap credit, said Yang Yuzhen, a business professor at Henan Normal University. “When growth slows, the Xinxiang government keeps supporting traditional industries to preserve jobs,” she said.

This slowdown is still in its early stages, this is 2007 in the housing bubble. Clearly there's a problem, the effects are being felt by those in the direct path of the oncoming storm, but the rest of the world is acting as if it doesn't really matter.

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