Inside China

Episode Summary

Executive Summary: The episode contrasts U.S. inflation data challenges with a deep dive into China’s economy. Matt Collier says CPI and PCE are running around 3%, above the Fed’s target, while data quality has worsened due to shutdown-related imputations. Logan Wright argues China’s official GDP overstates growth, masking a post-pandemic slowdown driven by a credit-fueled property collapse, weak domestic demand, and rising reliance on exports and strategic tech sectors.

Main Topics: U.S. inflation remains sticky around 3% (Priority: 5/5): Matt reviews December CPI, emphasizing that inflation is not accelerating sharply but remains well above the Fed’s comfort zone across headline, core, and tariff-sensitive measures. Data quality and imputation problems at the BLS (Priority: 5/5): The hosts discuss how shutdown-related missing data and broader staffing/funding cuts have increased imputation, reducing confidence in official inflation readings. China’s GDP statistics likely overstate actual growth (Priority: 5/5): Logan Wright argues Beijing’s production-side GDP reporting is too stable and disconnected from real indicators, especially after the property downturn and zero-COVID disruptions. China’s slowdown is rooted in the end of a credit bubble (Priority: 5/5): Wright frames China’s malaise as the consequence of an unprecedented credit expansion that is now exhausting the financial system and crushing property-led investment. Exports are propping up China, but create new global tensions (Priority: 4/5): With weak domestic demand, China depends more heavily on exports, which increases friction with the U.S. and other countries and risks export-driven deflation abroad. China’s AI and advanced manufacturing push is strategic, not macro-saving (Priority: 4/5): Wright says high-tech sectors may create security and industrial competition, but they are too small to offset the collapse in traditional sectors or restore rapid growth. Taiwan and military risk remain serious but low-probability in the near term (Priority: 4/5): Wright stresses that Beijing’s military options are expanding, but a Taiwan incursion remains unlikely in the next year and still low-probability over three years due to the economic cost.

Key Arguments: U.S. inflation is still around 3%, meaning the Fed is not yet at target even if inflation is no longer re-accelerating. The shutdown distorted inflation measurement, especially shelter, and rising imputation rates increase uncertainty around official CPI and PCE releases. China’s official GDP has become increasingly detached from reality, particularly since 2022, when property, consumption, and investment weakened sharply. China’s slowdown is mainly the unwind of a historic credit bubble, not just temporary cyclical weakness. Domestic demand is impaired because China’s financial system cannot easily write off bad loans without further weakening growth and bank profitability. China’s external trade surplus is rising because Beijing is relying on exports more than before, and global anti-China coordination remains fragmented. AI, robotics, EVs, and other strategic sectors matter geopolitically, but their scale is far too small to replace lost property-led growth. Beijing’s leverage over rare earths and other supply-chain chokepoints is real but likely time-limited and may have been used too early. Military action against Taiwan would be economically costly and is not a risk-free or likely near-term option. The biggest China risk may be that its economy will not overtake the U.S. as previously expected, even though security and industrial competition remain real.

Data Points: Headline CPI m/m: 0.3% - December consumer price index increase from November to December. Food at home CPI m/m: 0.7% - Grocery prices rose at the fastest pace since 2022. Food prices y/y: 2.4% - Year-over-year rise in food prices after December data. Energy CPI m/m: 0.3% - Energy contributed positively to December inflation, especially natural gas and utilities. Natural gas m/m: 4.4% - A notable jump in utility gas within the energy category. Core CPI y/y: 2.6% official; about 2.9% adjusted - Matt says the shutdown-related shelter distortion understates core inflation. Headline CPI y/y: 2.7% official; about 3.0% adjusted - Adjusted estimate accounts for October data distortion from the government shutdown. PCE inflation y/y: 2.8% rising to about 2.9% - Projected headline PCE after averaging October and November data. Core PCE y/y: 2.8% rising to about 3.1% - Projected core PCE after averaging October and November data. Different-cell imputation rate: 40% - Share of imputed prices using the less precise imputation method in December, up from roughly 10% earlier in the year. Total share of imputed prices: about 20% - Approximate share of all CPI prices imputed in a given month, up from around 2%–3% a year earlier. Tariff-sensitive CPI m/m: 0.1% to 0.14% - Tariff-heavy goods showed only a mild monthly increase despite tariff concerns. Tariff-sensitive CPI y/y: 2.2% - Year-over-year increase in the tariff-sensitive basket, slightly down from the prior month. China GDP growth 2022: 3% official - Wright argues this overstated a year of property collapse, lockdowns, and weak consumption. China GDP growth 2023: 5.2% official - Used as part of Wright’s argument that official growth remained implausibly stable. China GDP growth 2024: 5% official - Continues the pattern of unusually steady reported growth. China GDP growth 2025: around 5% official; 2.5%–3% estimated - Wright says Rhodium’s estimates point to much weaker actual growth. China GDP growth 2026: roughly 1.5%–2% expected - Wright’s view of the next cyclical downturn in China. China property sector decline: down 74% - Property-sector activity over the four-year cycle since the pandemic. China property sales: from about $2.7 trillion to a little over $1 trillion - Annualized property sales fell dramatically, underscoring the collapse. China credit growth 2008-2016: 18% average annual growth - Part of Wright’s description of the post-GFC credit boom. China credit growth 2017-2024: about 9% - Credit growth slowed after deleveraging efforts. China credit growth now: 6% - Properly measured current credit growth, in Wright’s estimate. China share of global GDP peak: 18.5% in 2021 - Wright says China has since declined as a share of world output. China share of global GDP official: about 17% - Official current estimate cited in the discussion. China share of global GDP Rhodium estimate: 15%–15.5% - Wright’s estimate of China’s current share of global GDP. China trade surplus 2025: $1.19 trillion - Wright says China’s trade surplus hit an all-time high. Military spending growth: 7.2% - China’s defense spending is growing faster than the overall budget. Strategic sectors share of GDP: about 6% to 6.5% - Wright’s estimate for AI, robotics, EVs, batteries, and related industries.

Pivotal Quotes: "Inflation's elevated. It's not accelerating to a worrying degree, but it's still materially above where the Fed would like it to be." — Matt Collier: Opening summary of the December CPI report and the broader inflation outlook. "It's really not. These are great titles, but all we have, Mark, as you know, is like really, you know, catchy titles to try to encourage people to read our stuff." — Logan Wright: Explaining the purpose of Rhodium’s provocative research titles on China’s GDP data. "The critical question in China is not what are the new growth drivers. The critical question in China is: who loses?" — Logan Wright: Describing why repairing China’s financial system is politically and fiscally difficult.

Implications: Listeners should expect the Fed to stay cautious on cuts while inflation data quality remains messy. For China, the episode suggests slower real growth, rising export dependence, and higher geopolitical risk without a macroeconomic “rescue” from AI or tech alone.