Chinese Salaries, Pork Prices and World Trade
Strong domestic wage growth is likely to keep Chinese inflation rates higher than those in Western economies, according to Josh Crabb, head of Asian equities at Old Mutual Global Investors
While many investors are anxious about the risk of China exporting deflation via currency devaluation and slowing demand in the world’s second largest economy, the signals from domestic inflation suggest a more nuanced picture.
Most of China’s consumer price index (CPI) is made up of food, housing, education and healthcare costs. And most of these, with the exception of food, have mainly domestic drivers and are well correlated with wage growth.
As the economy transitions to being led by consumption and services, rather than investment, this trend should persist. In addition, government policy will continue to support salary increases in China.
There is still significant wage growth in China, even if it has slowed somewhat. This suggests the country’s inflation rates are unlikely to be as low as in much of the developed world, where they hover close to zero or even below it.
In another sign of how different China’s inflation outlook is to that of the West, the vast majority of volatility in Chinese consumer prices has stemmed in the past from food, disproportionately driven by pork. In 2013, pork made up 60% of China’s meat consumption, according to China Statistical Yearbook 2014.
Meanwhile, China has increased its share of global exports in recent years, with Japan and the US ceding ground, altering the outlook for other Asian economies.
China has gained market share from South Korea and Taiwan, while the latter two countries have eaten in to Japan’s slice of exports. But China’s overall impact on global gross domestic product (GDP) has declined significantly, as world trade has slowed and the consumption and services side of its economy has continued to grow.
Of the large economies, South Korea is the most sensitive to exports of goods and services, as these account for over 50% of GDP.
One of our favoured countries, Vietnam, has been one of the biggest beneficiaries. It enjoys a cheap and educated labour force, and a lot of the foreign direct investment (FDI) that previously flowed into China historically is now entering Vietnam.
FDI will likely increase in Vietnam, because it is set to be the biggest beneficiary of the Trans-Pacific Partnership trade agreement among 12 Pacific Rim countries. Moreover, with goods and services exports forming 86.4% of GDP, the country would also likely benefit greatly from any export pick up.
Commodity exporters may continue to bear the brunt of further declines in the prices of natural resources. Yet here, too, large differences between Asian countries exist: Malaysia, with exports forming almost 80% of its output, would likely see a larger impact from the slowdown in its sale of commodities abroad than Australia, where exports only constitute about 20% of GDP.