The Divergence Between CPI And PPI Continues.

At present, the official economic data are mostly year-on-year growth indicators, it is difficult to accurately reflect the latest trend of economic activities.

China's GDP grew by 6.9% in the third quarter of 2015, slightly below 7% in the first half.

The sub index data showed great difference from year to year: infrastructure growth is still steady, real estate and manufacturing investment has slowed down, export growth has narrowed down, industrial production is still weak, consumption continues to remain relatively stable, and the departure between CPI and PPI continues.

Therefore, CF40's third quarter macroeconomic policy report has set up a new set of indicators to better measure the changes in economic trends.

In September 2015, China's CPI grew by 1.6% over the same period last year, while PPI recorded negative value for forty-fifth consecutive months, a 5.9% decline compared to the same period last year.

China's CPI and PPI have deviated for nearly 4 years since 2011.

Even in the recent two financial crises, the divergence time between the two price indices is not as obvious as it is now.

There are three reasons for the long divergence between CPI and PPI:

(1) the basket of CPI and PPI metrics is not the same.

According to the National Bureau of statistics, the weight of food in the CPI basket is about 30%, the proportion of living service weight is about 20%, and the other weights are 50%.

In contrast, the PPI basket measures more than the price of industrial products, excluding service prices.

Theoretically, there is a certain conduction relationship between the prices of industrial products and consumer goods and services.

But with the price of raw materials such as energy and iron ore decreasing, PPI has a more obvious downward trend than CPI.

(2) the final price of consumer goods and services (CPI) is jointly determined by the purchase price of industrial products (PPI) and the labor and wages paid in the production process of consumer goods and services.

If the increase of labor wages in the production department of consumer goods and services is different from that in the industrial production sector, there will be a divergence between the two.

Since 2011, the wage growth rate of the upstream mining industry has been significantly slower than that of the downstream real estate industry and retail sales sector. The latter two are closely related to the growth of service prices in CPI.

(3) although in some areas China still needs to import raw materials from abroad, some Chinese producers have become the actual pricing people in the international market due to their strong production capacity, such as steel products industry.

However, because of the fierce market competition in China, this kind of manufacturer's pricing ability is not as obvious as that of export products.

Against this background, once faced with overproduction and falling domestic product prices, manufacturers first consider not reducing production, but using their international market influence to maintain the domestic market sales and share in the form of low price export excess capacity.

Since 2011, with the gradual accumulation of steel industry capacity, the premium of steel prices in the offshore and offshore markets has gradually converged.

CPI and

It may be a long-term departure because of the change in export prices.

China's official manufacturing PMI recorded 49.7 and 49.8 respectively in August 2015 and September. The PMI of Caixin manufacturing industry hit 49.6 lags in March 2015, and was lower than 50 for 7 consecutive months.

From the definition, the 50 point is an important dividing line of the PMI index.

Therefore, many analysts believe that China's economy is in a dilemma of growth.

In China, where industrial production is growing rapidly, the trend of PMI may be different from the definition of traditional categories. The key factor is to know whether respondents' expectations for future expectations are based on growth or the speed of growth.

Because

Deviating from PPI, the PMI of Chinese manufacturing industry is not the 50 point. These data are difficult to accurately reflect the latest trend of China's economic activities.

The report builds a new metric for measuring growth - quarterly annual moving average.

To understand the construction of new indicators, we need to understand that there are three deficiencies in the recognition of the economic cycle.

First of all, Chinese traditional festivals vary from year to year in Gregorian calendar.

Correspondingly, the year-on-year growth data are affected by the length of working days in different months, reflecting the trend of growth is not accurate.

Second, the number of year-on-year growth will be affected by one-off events.

For example, before the APEC summit in Beijing in November 2014, the production of steel production in Beijing Tianjin Hebei area was limited, resulting in distortion of industrial production data.

Third, the year-on-year growth figures were calculated 12 months ago (T-12) and the month (T).

That is, the trend change between T-11 and T-1 can not be reflected in the year-on-year growth target.

In response to these shortcomings, the report builds a quarterly moving average index ("new index") to better measure the changes in economic trends:

(1) in view of the lack of the first point of the year-on-year indicators, the report uses the "Genhol" model of the US economic data Bureau, and adopts the X-13ARIMA-SEATS method to control the influence of the Spring Festival and the Mid Autumn Festival on the length of work day and the performance of economic indicators.

(2) the report calculated the three month moving average of the above seasonally adjusted economic indicators, thereby alleviating the noise impact caused by economic fluctuations in short-term monthly data.

(3) using the above moving average data, the report calculated the annual growth rate of the economic data of the first three months (T-5, T-4 and T-3) in the last three months (T-2, T-1, t), and defined it as a new indicator.

It can be seen that the main advantage of the new index compared to the year-on-year growth index is the use of the latest 6 months' economic data (i.e. from T-5 to t) to overcome the third shortcomings of the previous year's economic indicators.

In addition, the new indicators are less likely to be affected by one-off events.

If this

Better reflect the latest trend, then perhaps economic activity is not as unstable or weak as the year-on-year indicators show. In recent months, the real estate boom index, industrial added value, CPI, retail sales and import and export have risen to a certain extent.

Distinguishing between slower growth and negative growth is of great significance for assessing China's economic fundamentals.

The main concern for China's economy is not slowing down.

If PMI points to economic slowdown instead of negative economic growth, it is no longer necessary to worry about the "hard landing" of China's economy.

The report identifies the following 9 models: the PMI index (corresponding expansion and contraction) corresponding to the PMI growth rate of the major economies in the Asia Pacific region, and the PMI index (corresponding to the speed of expansion) corresponding to the growth rate of the corresponding industrial production is estimated to be 0.

In other major Asian Pacific economies, except China, the PMI corresponds to a close to 50 point of the industrial chain.

China's PMI corresponding to the industrial production year-on-year growth rate is 51.1, but its corresponding annulus and year-on-year industrial production and prosperity demarcation line corresponds to 33.2 and 37.6 respectively.

This means that 47.2 of the current PMI readings correspond to industrial production deceleration (compared with 51.1), rather than industrial production shrinkage (37.6).