East Asia Econ

The three red lines and covid delivered a huge, multi-year blow to the economy. Multiple signs have started to emerge that this hit has been absorbed, and that China macro is stabilising. This suggests that the recent lessening of deflation might prove durable, with broad implications across markets

Two themes stand out. First, macro in China is stabilising following the multi-year decline triggered by the twin shocks of the three red lines and zero covid. Second, the chip supercycle has yet to be derailed by the Iran War.

The broad theme is macro is stabilisation, shown by three indicators that are bottoming after multi-year declines: property starts, household demand deposits, and producer prices. The implications, as are already being seen, are slower rate cuts, stabilising yields, and a stronger currency.

Energy import prices surged 50% in March, and that will undoubtedly raise inflation. However, Korea's terms of trade actually continued to rise (just about), helped by the continued sharp rise in chip export prices. For Korean growth, there is an offset to this energy crisis.

Today's trade data for March don't get us so far: only headline data have been released, and underlying trends are still obscured by Chinese New Year distortions. Overall, however, exports look firm, with auto sales rising again. Imports are very strong, but that is more about chips than energy.

My latest video, discussing the impact of the Iran war on the outlook for the region

The lessening of deflation has largely been driven by external factors. But domestic monetary developments have helped: the increase in PBC liquidity injections, and as shown again by today's March monetary release, the stabilisation of M1 growth and the M1:M2 ratio.

Trade data for the first 10 days are volatile. But the April data are still worth highlighting. They show strong exports and a rising trade surplus, which offers a contrast with the BOK's concerns about the cycle, and the market's worries about the KRW.

Four developments stand out: the return of inflation in China; cycle nervousness in Japan and Korea; that's despite a continued strong AI cycle that is boosting exports in Korea and Taiwan; and the visit of the KMT chair to China, the importance of which depends on Trump's meeting with Xi.

Exports in March were strong again. There aren't yet signs of the Iran war derailing the chip cycle, and while energy imports will increase more quickly, the impact on the trade surplus will be limited. The outlook for Taiwan as of now is resilient growth and higher inflation.

For me, the tone of today's BOK meeting was a surprising mix of uncertainty and conviction. On the one hand, the bank stressed that the outlook is unclear, depending on events in the Middle East. On the other, it seems very sure that inflation will be quite a lot higher than 2%, and growth lower.

That the return of PPI inflation in March was driven by an energy price shock isn't positive. In fact, though, the recovery in PPI pre-dates the Iran war, beginning in June last year. Positive inflation reinforces the macro narrative that China's cycle is more stable, supporting rates and the CNY.