The benefits are obvious! Why Slowing U.S. Inflation Is Good News for China

According to the latest data released by the U.S. Bureau of Labor Statistics, the U.S. seasonally adjusted CPI rose by 3.2% year-on-year in October, lower than the expected 3.3% and a decrease from September.

And the core CPI, which excludes food and energy costs, rose 4% year-on-year, which was also lower than the 4.1% expected.

What do you think of this data? Is this good news for China?

The slowdown in U.S. inflation has a direct impact on the Federal Reserve’s interest rate hike policy.

The Fed implements a dual-goal system, which is to "achieve price stability and promote maximum employment."

Simply put, it means controlling the unemployment rate below 4.5% and keeping inflation below 2%.

But unemployment and inflation are like two ends of a seesaw, and it is difficult to reach balance. They have a cyclical alternating relationship. When unemployment is high, inflation is low; when unemployment is low, inflation rises.

This relationship has been very obvious in the past few years during the epidemic.

Affected by the epidemic, the U.S. unemployment rate began to rise at the beginning of 2020, reaching a peak of nearly ten years in April, reaching 14.7%.

In response, the Federal Reserve cut interest rates in an emergency. In March 2020, the U.S. federal funds target rate fell to a record low of only 0.25%. And this interest rate has been maintained for 2 years, until it rose to 0.5% in March last year.

As unemployment falls, inflation soars.

The U.S. CPI reached its highest year-on-year growth rate of 9.1%, with prices rising and the currency depreciating. So last March the Fed had to start raising interest rates.

So far, the United States has raised interest rates a total of 11 times. At the highest point, it raised interest rates four times in a row by 75 basis points, which was the fastest rate of interest rate increases in the past 40 years. It was not until February this year that the rate hike gradually slowed down and returned to 25 basis points.

The current slowdown in inflation means that the Federal Reserve is likely not to continue raising interest rates.

For China, the pressure on the RMB exchange rate will be released.

In the past year, the Federal Reserve's interest rate hikes have caused the global dollar to flow back, thus affecting the RMB exchange rate.

Data show that before March last year, the U.S. dollar against the yuan was at a low of nearly 5 years, at 6.3457. However, as the Federal Reserve raised interest rates, the RMB depreciated. Despite the country's foreign exchange market adjustments, the rise in the U.S. dollar index still caused fluctuations in the RMB exchange rate.

In September this year, the US dollar against the yuan also reached its highest value in the past five years, at 7.1839, an increase of 13.2% from the previous lowest value.

However, with the release of the latest CPI data in the United States, global market expectations that the Federal Reserve is "unlikely to continue to raise interest rates" have increased. On the same day, the U.S. dollar index immediately fell.

According to data from the People's Bank of China, the dollar against the yuan also fell, reaching 7.1752 on the 15th.

Second, capital outflow pressure is expected to ease, which will benefit investment.

Last year, the Federal Reserve raised interest rates and the supply of U.S. dollars shrank, leading to the return of foreign capital in China.

The most direct one is the total amount of Chinese bonds held by overseas institutions and individuals.

According to data from the Bank of China, the total amount of Chinese bonds held by foreign institutions and individuals has been on a fluctuating and rising trend since the data became available, and the increase has been obvious. However, affected by interest rate hikes, this value began to decline after peaking in January last year. As of June this year, the total scale has dropped to 3,334.1 billion yuan, a decrease of 19.69% from the previous peak.

In fact, this return of foreign capital will, to some extent, lead some developing countries into debt crises.

For example, the debt crisis in Latin America in the late 1970s, the debt crisis in Mexico in 1995, and the Asian financial crisis in 1997-1998 were all related to a certain extent due to the Federal Reserve's interest rate hikes.

However, the scale of foreign capital holdings in my country's bond market is generally small, so the impact of the reflow on the liquidity of inter-bank funds is limited. According to data from the China Bond Information Network, since 2021, the proportion of foreign capital in inter-bank spot bond transactions has been stable at around 3% for a long time, which is a relatively small proportion.

However, experts said that the return of foreign capital has greatly disturbed market sentiment. Due to the high global risk aversion, it will also affect the domestic risk investment situation, which also led to the overall fluctuation of my country's stock market last year.

The news of slowing inflation on the 14th was immediately reflected in the stock market.

The three major U.S. stock indexes all closed up by more than 1%, and the three major A-share indexes also closed up collectively. The Shanghai Composite Index, Shenzhen Stock Exchange Component Index, and ChiNext Index rose by 0.55%, 0.72%, and 0.53% respectively. The stock market has an obvious rebound trend.

Although its share has declined in the past two years, the United States is still one of China's major exporters. Last year's interest rate hike tightened its financial environment, affected market demand, and weakened external demand, which in turn led to a slowdown in my country's foreign trade growth.

From the data point of view, before the interest rate hike, the demand from the US manufacturing industry was strong, the PMI index - new orders was well above the 50% cut-off point, and the economic expansion trend was obvious.

However, after the interest rate hike, demand contracted rapidly. In September last year, the PMI index - new orders fell by 50%, and as of October this year, it has been below the dividing point for 14 consecutive months, indicating that the manufacturing industry is in a cooling stage.

This is directly reflected in the year-on-year increase in U.S. import demand.

The year-on-year growth rate of U.S. imports began to decline in March last year and entered negative growth in March this year. As of September this year, year-on-year growth has been negative for seven consecutive months.

According to data from the General Administration of Customs, the year-on-year growth rate of China's exports to the United States has also been negative for 15 consecutive months. Since the United States' export share still accounts for about 16% of China's total, this has also led to a slowdown in China's overall export growth.

However, the current decline is showing a narrowing trend. Moreover, as U.S. interest rate hikes slow down and global demand gradually picks up, exports will also improve.

Overall, U.S. inflation slowed down in October and pressure on the Federal Reserve eased, which is generally good for the Chinese economy.

However, whether the Fed will cut interest rates requires further observation. Because from the breakdown of data, the current decline in the U.S. CPI is related to the sharp decline in gasoline prices, which fell 5% month-on-month. Experts say that changes in energy prices in 2024 are subject to a certain degree of uncertainty, depending on whether geopolitical conflicts will worsen. Therefore, the possibility of "secondary inflation" in the United States cannot be ruled out.