China

At the end of last year, China reported that its CPI had turned positive from a year over-over-basis. Deflation had ended. Last week, the PBOC allowed the three month bill yield to rise for the first time. This small nuanced move, that will likely be reaffirmed with the 1-year bill sale this week, is a small token move and of greater symbolism than substance. Coupled with today’s news that exports also returned to growth on a year-over-year basis (first time in 14 months), you get speculation of yuan appreciation. This is evident in the 12-month forwards. Chinese officials appreciate the base effect that will flatter the data and is unlikely to act in the near-term to engineer a stronger yuan. The real importance of the strength of the Chinese economy is not so much its exports, but the import side. Imports surged almost 56% year-over-year. Imports from Australia and Malaysia, for example, have doubled. The strength of Chinese imports will help support numerous economies in the region and commodity producers including South Africa and Brazil.