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What Do China’s CPI, PPI, and Debt Data Indicate?

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China’s CPI and PPI data

China’s consumer price index (or CPI) rose to 1.6% year-over-year (or YoY) in September, mainly due to higher food prices, especially pork, and not due to an improvement in economic activity. In September, food prices went up by 2.7% YoY.

Meanwhile, in September, the producer price index (or PPI) for manufactured goods fell 5.9% YoY as manufacturers resorted to price-cutting due to weak demand. The risk of deflation is growing in the manufacturing sector, which is more disturbing.

Because lower prices mean lower profits for factories, with shrinking margins it becomes difficult for manufacturers to run their business for longer amounts of time.

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China’s debt burden is a ticking time-bomb

According to the People’s Bank of China (or PBoC), RMB (renminbi) loans increased by 144.3 billion Chinese yuan YoY to 1.1 trillion yuan in September. Year-to-date (or YTD), China’s new RMB lending totaled 9.9 trillion yuan.

China’s debt burden is constantly rising while its gross domestic product (or GDP) is shrinking. With the slowdown in global demand, China is no longer in a position to support the mounting interest burden that arises from a large amount of debt.

Impact on mutual funds

Rising CPI and falling PPI affect all the companies operating in China and therefore mutual funds such as the Clough China Fund – Class A (CHNAX), the Guinness Atkinson China and Hong Kong Fund (ICHKX), the Eaton Vance Greater China Growth Fund – Class A (EVCGX), and the John Hancock Greater China Opportunities Fund – Class A (JCOAX).

Demand for consumer discretionary goods, particularly for luxury goods, has fallen, which has adversely impacted consumer discretionary companies Jumei International (JMEI), Qunar Cayman Islands (QUNR), Ctrip.com International (CTRP), and JD.com (JD).

China’s debt burden is rising at an alarming rate, and there is a danger that the country may fall into a debt trap. Excessive borrowing may jeopardize the economic growth of the economy, with mutual funds impacted at the broader macroeconomic level.

For more analysis on mutual funds, please visit Market Realist’s Mutual Funds page.

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