Inflation Fears & Fed Outlook

"We still expect much of the recent surge in upstream price pressure to prove transitory, with industrial metal prices likely to drop back later this year as a tighter policy stance weighs on construction activity,"

China's factory gate prices rose at the fastest rate in three and a half years in April, data showed on Tuesday, adding to inflation concerns as the world's second-largest economy gathers momentum after strong growth in the first quarter.

The producer price index (PPI), a gauge of industrial profitability, rose 6.8% from a year earlier, the National Bureau of Statistics said, ahead of a 6.5% rise tipped by a Reuters poll of analysts and a 4.4% rise in March.

Investors globally are increasingly worried that pandemic-driven stimulus measures could spark a rapid rise in inflation and force central banks to raise interest rates and take other tightening measures, potentially holding back economic recovery.

However, while producer prices are soaring, analysts said the rising costs were unlikely to be fully passed on to consumers. April's consumer price index (CPI) rose by a modest 0.9% on a year earlier.

Sheng Laiyun, a deputy director at NBS, said on Friday that China's full-year CPI is likely to be significantly below the official target of around 3%.

Sheng attributed China's likely muted inflation to currently slow core inflation, economic fundamentals where supply has outstripped demand, relatively restrained macropolicy support, recovering pork supply and a limited pass-through effect from PPI to CPI.

The official figures released on Tuesday showed the population grew just 5.4 per cent from 1.34bn in 2010 — the lowest rate of increase between censuses since the People’s Republic of China began collecting data in 1953.

over-65s now make up 13.5 per cent of the population, compared with 8.9 per cent in 2010 when the last census was completed.

The steep decline is the latest evidence of the demographic challenges facing China, where urbanisation and the historic one-child policy has resulted in a rapidly ageing population that will put pressure on public finances over coming decades.

“We’ve known for some time there would be a decline, but such a big drop was beyond our expectations,” said Huang Wenzheng, a demography expert at the Center for China and Globalization, a Beijing-based think-tank. “We believe [last year’s decline] is related to Covid: that households are more worried now.”

 China is claiming a) population GREW 11-12 million AND b) they had 10.35 million births in 2020. Let's start by assuming that both of those facts are true. This means either/both a) China had ZERO deaths in 2020 AND b) raised 1-2 million people from the dead to grow 4/n— Jónas Haraldsson Balding 大老板 (@BaldingsWorld) May 11, 2021 

Some argue that in a new age of technology, worries about demographics are overblown.

China—with its leading-edge capabilities in areas like artificial intelligence—is well placed.

One hears similar takes on the Chinese labor force, which has been shrinking since 2011. Why should China worry about a dearth of factory hands, techno-optimists say, when it’s the world’s largest market for robots?

Such arguments miss a critical point, however.

Population size isn’t the main issue; composition also matters. China’s rise is likely to be thrown off by a massive age imbalance. By 2050, one in three Chinese will be over 60, a cohort of seniors so enormous that if they formed a country, its population would be comparable to America today.

Over the same period, China will go from having eight workers for each retiree down to two, turning a healthy pyramid-shaped population structure into a rectangle.

The Chinese Academy of Social Sciences warns that China’s main pension fund could run out of money by 2035. Fewer working-age adults (who have a propensity to save) and more retirees (who tend to spend) will deplete the supply of household savings that can be mobilized for investment. “Understand this,” wrote researchers at the People’s Bank of China recently, “without [capital] accumulation, there is no growth.”

If you think China’s debt burden is worrisome now—the country’s debt-to-GDP ratio exploded from less than 150% in 2008 to almost 300% today—it’s about to get much worse, just as it did in Japan.

Innovation and entrepreneurship may suffer, too. Younger populations are more inventive. James Liang, an economist and co-founder of China’s leading online travel agency Trip.com Group Ltd., said he worries about China’s shrinking talent pool. “In simple terms, the more people you have, the more research scientists and engineers will be available to develop world-leading artificial intelligence technologies to overtake your competitors,” he said.