☀️☕️ Deflating China

📝 Focus

• Deflating China

📊 In the Markets

• India vs HK

• Nvidia Cloud

📖 MoneyFitt Explains

• 🎓️ Deflation vs. Inflation

💸 Personal Finance Corner

• Budgeting 101: Why a Strong Budget Is a Catalyst for Financial Freedom

📝 Focus

Deflating China

China's consumer prices fell sharply by 0.5% year-on-year in November, marking the steepest fall since November 2020 and coming in below Reuters survey forecasts of a 0.1% drop. That 0.5% drop was also seen in prices compared to October levels. Falling prices is known as deflation🎓, and while that may sound awesome to those in countries currently grappling with rising prices (i.e. inflation🎓) and the resulting cost of living crisis, the reality is far from that.

Even worse, producer prices, often a leading indicator of consumer prices since producers often pass on cost changes to consumers with a lag, plunged by 3% compared to 12 months ago. This was even faster than October’s 2.6% drop and marked the 14th month in a row of falling “factory gate prices,” reflecting a persistently sluggish domestic economy. (Global ratings agency Moody's last Tuesday cut China's sovereign credit rating outlook to negative, which China’s finance ministry called “disappointing.”)

Ongoing liquidity problems in the immense and immensely troubled property sector, mixed-to-feeble trade data, soaring local government debt, geopolitical tensions leading to increased friendshoring (and “China +1”) all feed into the deflationary trends reflecting the sluggish post-zero-Covid recovery despite optimistically high hopes a year ago.

..... ▷ November's retail sales growth data will likely also reflect dull consumer activity amidst cautious spending habits and a 0.6% drop in imports. 

And all of it is prompting calls for increased stimulus from Beijing to get China's economic recovery back on track. 

On Friday, China’s Politburo released a statement that it would bolster domestic demand by continuing to implement “proactive” fiscal policies and “prudent” monetary policies next year, but traders are looking ahead to more concrete central government stimulus at the annual "Central Economic Work Conference" which usually starts in mid-December.

..... ▷ Needless to say, declining prices contrast with the battles with runaway inflation seen in most other large economies post-Covid.

Other than Japan, which has run an ultra-loose, highly stimulative interest rate policy to deal with economic stagnation for decades… without much success. Japan has been grappling with deflation for a quarter of a century and over the last decade, from 2013 to 2022, Japan's real GDP has grown by a total of just 6.58% in total, an average rate of barely 1%.

And this points directly to the long-lasting dangers of a deflationary economy, which discourages businesses from investing and consumers from spending, and explains why central banks around the world, from The Fed to the BOE to the ECB and beyond, take pains to target a positive inflation rate (of 2% in most cases.)

Japan faces specific challenges holding back economic growth, though, namely 

1. Its rapidly ageing population, with a declining birth rate and increasing life expectancy. This leads to a shrinking workforce and lower domestic demand.

2. A massive debt overhang, one of the highest national debt levels in the world, which limits government spending and investments that could stimulate economic growth.

3. Structural rigidities in the labour markets and in corporate governance which can hinder innovation and entrepreneurship.

In our "China: Old before it gets Rich" Focus piece from June, months before the CPI flipped to deflation, we wrote that: "Longer-term comparisons with Japan do look a bit more ominous... The Japanese economy had decades of economic stagnation after the bursting in the late 1980s of the asset price bubbles in stocks and property, which contributed to a massive banking crisis, which then led to years of feeble lending and persistent deflation... Another shared characteristic is a shrinking population... economic potential is a function of population (workforce) and productivity growth. Japan's population has been declining since 2010... Last year, China's population fell for the first time in 60 years ​​after a multi-year decline in its birth rate that experts now say is irreversible... But unlike its rapidly ageing rivals, China potentially faces the prospect of becoming old before it gets rich."

(See: “China: Deflation Nation… like Japan.”)

🇸🇬 Singapore: Let’s Get MoneyFitt!

📊 In the Markets

Friday trading in Asia-Pacific markets was mixed as HK’s benchmark Hang Seng Index gave up early gains to close flat ahead of the “patriots only” local district council elections on Sunday in which voter turnout was reportedly very low. Meanwhile, the city’s resale private home prices fell to a six-and-a-half-year low, according to an index compiled by Centaline Property, reflecting weak sentiment and new projects priced at or below secondary market levels.

Elsewhere in Asia, Japan’s third-quarter GDP was revised downward in a surprise move from a 0.5% to a 0.7% fall quarter-on-quarter, making the BOJ’s long-anticipated relaxation of Japan’s ultra-loose monetary policy (i.e. tightening of monetary conditions with higher interest rates) that much harder.

US and European shares traded higher on Friday, with both the S&P 500 and Nasdaq hitting levels not seen since early 2022 after a surprisingly strong US jobs report.

As usual, this could have gone either way. 

A strong economy could have been read by traders as a reason for the Fed to keep interest rates higher for longer and led to a sell-off in shares. Consumer inflation measured by the Fed’s target Core PCE Index is, at 3.5% in October, still well above the target of 2.0% (though clearly moving in the right direction, having peaked this cycle at 5.57% in Feb-22.)

In the event, it seems to have fueled investor optimism about a soft landing for the economy, which is a debate that seems to have ended… at least for now (see: “A Soft Landing may be Hard.”)

Investors did push out the likely first cut in interest rates from March to May, though after the Labor Department report, showing that nonfarm payrolls increased by 199,000 jobs in November, higher than Wall Street’s Finest’s average best guesstimate of 180,000.

The unemployment rate slipped back to 3.7% from 3.8% but remains very very low (. Average earnings edged up to 0.4% on the month before, which is higher than the forecast of 0.3% growth. Average hourly earnings are NOT wages. If all wages earned by everyone in their jobs are unchanged and the number of higher-paid workers in the economy increases, average earnings go up, i.e. the composition of the workforce affects this number, making it hard to as a guide for future (or current) inflation. 

If the Fed delivers the fabled soft landing, that could propel Jerome Powell to the top table of the finest Chairmen of the Federal Reserve in history alongside the likes of Paul Volcker, Alan Greenspan and Ben Bernanke (... who? See “Fed Geek Corner.”)

India vs HK… The NSE vs HKEX

Meanwhile, the value of stocks listed on the NSE (National Stock Exchange of India) is closing in on those listed on the Hong Kong Exchange at $3.7tn vs $3.9tn as of the end of October. Given market performance since then (India sharply up, HK sharply down), the NSE could well have overhauled HKEX by now.

But while 77% of the market value of HKEX listings comes from China HQ-ed companies and the outlooks for China and India seem to be on divergent paths (and with India this year having overtaken China in total population by UN estimates), the combined size of all listings on China’s exchanges including HK continues to be much greater than those of India’s: 

- China A-shares: $8.6 trillion

- Hong Kong Stock Exchange: $3.5 trillion

- National Stock Exchange of India (NSE): $3.2 trillion

- Bombay Stock Exchange (BSE): $0.5 trillion

(Of course, the stock market is not the economy and the economy is not the stock market.)

The BSE is the oldest stock exchange in Asia, having been established in 1875 as the "Native Share and Stock Brokers' Association" while the NSE only started trading in 1994. The NSE and BSE have about 2,000 dual listings, typically the larger and more established companies in India. The NSE is more liquid than the BSE, i.e. easier to buy and sell a large amount of shares, and has stricter listing requirements than the BSE, i.e. must meet tougher financial and other criteria.

(Also see “Dynamic Duo: Renminbi and Rupee” and “Shifting BRICS and the Petrodollar.”)

Nvidia Cloud

AI chip giant Nvidia is partnering in a $4.3bn (MYR20bn) AI infrastructure project, including supercomputers and cloud computing at a data centre in the Malaysian state of Johor (bordering Singapore) with conglomerate YTL. 

The deal would provide businesses in Southeast Asia with supercomputing cloud services through access to Nvidia’s H100 Tensor Core GPUs via Nvidia’s own cloud computing platform. YTL Power International will also use the AI cloud computing platform to build a large language model in Malay. YTL Corp, the parent of YTL Power and YTL Communications, popped 10% on Friday, bringing its gains this year to 200%. (YTL Power rose 6.6%, taking its YTD up 240%.)

Nvidia is obviously best known for selling its graphics processing units (GPUs) to cloud giants like Amazon’s AWS, Microsoft Azure and Google Cloud for their AI services, the company has now expanded into offering its own full-stack AI cloud platform, obviously in direct competition with its customers’ own AI solutions like Amazon SageMaker, Azure Machine Learning and Google AI Platform.

 ..... ▷ Nvidia's entry into the cloud services market isn’t a recent or even single event, but rather a gradual process built up over the years with the development and launch of various cloud platforms and services starting in 2016 with the NVIDIA GPU Cloud (NGC) with access to pre-configured virtual machines equipped with Nvidia GPUs, enabling developers to experiment and run AI workloads in the cloud. 

Then came NVIDIA Deep Learning Accelerator (NVDLA) in 2018, a cloud-based AI accelerator designed for faster and more efficient deep learning training and inference. 

 ..... ▷ But full-fledged cloud platforms only launched in March of this year with NVIDIA DGX Cloud, providing a fully managed AI supercomputing service offering on-demand access to the latest Nvidia hardware and software, followed in April by the NVIDIA Omniverse Cloud, a cloud-based platform for building and collaborating on 3D applications and metaverse experiences.

 ..... ▷ AWS, Azure, and Google Cloud Platform still hold dominant market shares in the overall cloud market, but Nvidia's more aggressive move into the space is an interesting challenge to the current dynamic. 

Its expertise in hardware and software, combined with a focus on specific AI tasks, could make it a strong contender in this super-hot and still-evolving market. 

It remains to be seen whether Nvidia can build significant market share and cloud experience to become a major player in the broader cloud computing landscape or even if it wants or needs to, and if it does, what its customers’ response might be. (See: “AMD then what happened?”)