China’s thirst is beginning to quell

CHINESE domestic demand isn’t keeping pace with its industrial production. According to figures released at the weekend, Chinese June consumer price index-based inflation figures (CPI) fell to 2.2 per cent year on year, down from 3 per cent in May.

Chinese macro statistics are notoriously unreliable, with suspicions that the communist government smoothes figures by underreporting growth during periods of strong cyclical growth and over-reporting during slumps. But with China seen as the healthiest looking horse in the glue factory, its trading partners are particularly susceptible to any bad data.

It’s not just the miners, such as BHP Billiton, that are dependent on China as a market for their produce. China has been vaunted as the solve-all answer to everybody’s problems. Who will run to the rescue of a crumbling European monetary union which has to bail out its own bailout fund? Who will prop up commodity prices as Western demand slumps? Who will keep liquidity in the wine investment market by spending six-figure sums on cases of premier cru wine? China, China – and yes, China again. No, sorry, it’s China again. But it seems even the luxury booze market isn’t safe. The Liv-ex Fine Wines 50 – an index which tracks sales of the last ten vintages of the five Bordeaux first growths – hit its peak on 28 June, around the same time that a Chinese buyer spent $540,000 on 300 bottles of Chateau Lafite Rothschild at a Christie’s auction in Hong Kong. And while the Premier Cru market may not be of concern to the average UK consumer, a notable slowdown in Chinese demand will hit many Western firms below the water line.

Burberry and LVMH have both become heavily reliant on demand from the rising Chinese middle-class to make up the shortfall from European consumers, who have become relatively less willing to buy a new trench coat or Louis Vuitton handbag.

China has showed time and again that, though it has taken on the mannerisms and the premier cru tastes of its Western capitalist counterparties, it is still an authoritarian, centrally controlled economy. Chinese Premier Wen Jiabao reacted to the inflation drop by defending the stability of the Chinese economy, but promised that “the government will further intensify policy fine-tuning, maintain a proactive fiscal policy – particularly with improving the policy of structural tax cuts – continue the prudent monetary policy to effectively address the structural conflict between credit supply and demand [and] make policy more targeted, pre-emptive and effective.” Coupled with this, the Chinese premier has publicly repeated his intentions to pre-emptively address any deflation fears. Traders should be wary of this and ready to react to any big interventionist moves from the people’s republic.