March twenty-seventh, two thousand twenty-six
Global Repricing: When Crowded Growth Runs Into a Fundamental Shock, Starting With Pop Mart
Global Repricing: When Crowded Growth Runs Into a Fundamental Shock, Starting With Pop Mart
Author: Ariston
Introduction: On one side are position unwinds and squeeze risk; on another, the gradual pass-through of oil prices downstream; on another, extreme divergence within Asia; and alongside these, China is being repriced amid geopolitics and its five-year plan...
Chart: When crowded growth runs into a fundamental slowdown, repricing can be extremely violent. Pop Mart is the most typical recent example.
As global indexes struggle near key lifelines, micro-level markets are undergoing extremely violent repricing. The vulnerabilities of crowded growth and consumer discretionary stocks are being exposed all at once.
In the two days after Pop Mart reported results, its stock fell 31%. Daily short-sell volume surged to 2650 ten thousand shares, equivalent to 5.2 hundred million U.S. dollars. Behind the trading are questions about crowded growth amid risk aversion, as well as fragile investor sentiment on the brink of a snap. At both the macro and micro levels, how high valuations are repriced after growth slows is a question everyone must answer. The company’s resumption of buybacks can of course provide some marginal support, but what will truly determine the direction is whether the market is still willing to award a sufficient premium to the momentum and valuation framework built on the upbeat sentiment of recent times.
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Squeeze setups are actually emerging in many places. Looking more broadly, semiconductor memory is another example of divergence. In South Korea, foreign and long-term investors are still pulling out, and retail investors’ former confidence in “buying every dip” has been eroded by weaker deposit trends and a higher dollar-won exchange rate. Taiwan, by contrast, has seen a more typical squeeze setup, as Nanya Technology’s private placement brings in industrial capital while short positioning in the sector remains heavy.
Chart: The oil shock is not a one-dimensional story in China
I. China cannot be lumped together with the West or other parts of Asia
China’s direct aggregate exposure to an energy shock from the Middle East is not as large as it might seem at first glance. By energy mix, energy sourced from the Gulf Cooperation Council accounts for only about 6% of China’s total energy consumption. Looking only at oil, flows related to the Strait of Hormuz account for about thirty percent of China’s total oil supply, but when placed in the context of the overall energy mix, the impact on total energy consumption falls to about 5%. Direct exposure to natural gas is even lower, at less than 1%, while coal still accounts for nearly 60% of China’s primary energy and is supplied almost entirely domestically.
Relying on the single label “high import dependence” can easily overstate China’s true vulnerability.
This is also why, recently, Chinese assets have reacted noticeably more mildly than those in India, Japan and South Korea.
In fact, from the end of 2 month, when the conflict escalated, to mid-3 month, volatility in Chinese equities, the exchange rate and 10-year government bond yields could all be considered relatively contained. At least through last week, data on oil tankers arriving at China’s major ports showed no obvious disruption. Meanwhile, China’s implied crude inventories have accumulated at a markedly faster-than-normal pace over the past half year. Combined with administrative adjustments to refined fuel prices and a 130-dollar cap, China has a much longer buffer than economies elsewhere in the world.
As long as the shock does not drag on globally for too long, the Chinese economy will remain a relative outperformer within the foreseeable future.
Chart: China imports the largest absolute volume of crude oil through the Strait of Hormuz, but its exposure relative to total energy consumption is not high, and asset-price reactions have also been milder than in most Asian economies
II. Nominal variables, not aggregate demand itself
If we examine the most direct impact of this round of shocks on China, it may be less about CPI at the tail end of the chain and more about the early end of more than three years of PPI deflation. As of this week, Citi has raised its forecast for China’s 26-year PPI from -0.4% to 1.0%, and expects the month-on-month figure for 3 to reach 0.8%, turning positive year over year after 41 months in negative territory. Goldman Sachs has also gradually raised its full-year CPI and PPI forecasts to 1.0%. The two firms use different model coefficients, but their core conclusion is the same: China will first see changes in nominal variables such as PPI and the GDP deflator, rather than inflation on the household side.(Citi estimates that an oil-price increase of 10% corresponds to an increase of about 1.15 percentage points in PPI and 0.23 percentage points in CPI. Goldman is somewhat more conservative, estimating increases closer to PPI percentage points in 0.5 and CPI percentage points in 0.1.)
This is not entirely bad news for China.
With PPI negative for 41 consecutive months and the GDP deflator contracting for 11 consecutive quarters, corporate profits, fiscal revenues and micro-level expectations had already been pushed very low. If oil prices now pull these nominal indicators back into positive territory, this could instead ease some deflationary pressure in the short term, at least helping price expectations break free from the momentum of an ongoing decline and vicious cycle.
But it is essential to distinguish between nominal repair and a restart in demand.It looks more like a price recovery driven by costs: it can improve some of the variables on the books, but it is still not enough to show that household consumption, private investment, or service prices have returned to a broad-based recovery:
Chart: This oil shock is being transmitted to China much more through PPI than CPI, with the deflator turning positive faster than inflation on the household side
III. Broad Reflation and Upstream Reflation
Often, as soon as the market sees PPI about to turn positive, it naturally starts thinking in terms of a full-scale return of inflation. But the PPI recovery driven by oil is concentrated, to the extent of about 80%, in upstream industrial sectors such as energy, metals, chemicals, and building materials.In other words, changes in certain specific sectors do not automatically mean that price pressures will spread widely along the industrial chain to the midstream and downstream.
More importantly, the pass-through from PPI to core CPI remains very weak. Generally speaking, an increase in PPI of 1% corresponds to only about 5 basis points of change in core CPI; a supply-driven oil price shock in 10% has an impact of only a few basis points on core CPI, and that impact is limited in duration. In this situation, the shock’s persistence is especially important: if it drags on, it can lead to sustained margin compression downstream, slower global demand, and raw-material shortages in Asia’s industrial chains. In other words, China may gain a little breathing room from nominal repair in the short term, but if this is misread as broad-based reflation, it will be easy to overestimate the capacity of downstream sectors and the consumption chain to absorb the impact.
Chart: The improvement in PPI driven by oil is concentrated mainly in upstream industrial sectors, with little spillover to core inflation and service prices
IV. China’s fundamentals are not weak right now, but it is still far too soon to ignore external shocks
Looking only at the data from the past two months, China’s near-term fundamentals are in fact solid, and could even be described as very strong.1-2 month industrial value added, retail sales, and fixed-asset investment all came in above expectations, while the fiscal deficit is also widening following the expansion. Yet the composition of this data remains typical: industrial production and services output are relatively strong, while retail sales and investment remain relatively weak, The old problem of “strong production, weak demand” has not gone away; it has simply been masked for now by stronger external demand, fiscal support, and the post-holiday recovery.
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Copper inventory data are also quite interesting...
According to JPM’s high-frequency tracking, in the week ending 3 month 20, China’s visible copper inventories fell by 2.5 tonnes, and this drawdown began clearly earlier than in previous years. Total inventories also fell to 47.3 tonnes, gradually approaching the historical average.This shows that demand in the real economy is not entirely absent. At least some industrial chains are seeing improved operating rates and restocking, and copper demand provides a substantial counterpoint to the macroeconomic headwinds. But the tracking also cautions that the decline in copper prices since the conflict began still falls far short of fully pricing in macroeconomic risks; technical support remains at a lower level.
Chart: The early drawdown in copper inventories shows that industrial demand is not weak, but this is more like a counterbalance to macroeconomic headwinds
V. The policy pace may shift accordingly
If nominal variables recover first while growth does not immediately falter, the policy response will certainly not be to step up stimulus as a first move. PPI returning to positive territory will reduce the urgency of using fiscal policy as a backstop again in the short term, and may also push expected rate cuts further out, at the latest into the second half of 26.
The logic is not complicated.
Over the past two decades, whenever China’s PPI has been in a clearly rising phase, policymakers have rarely delivered strong stimulus at the same time. Once oil prices provide some support to the nominal side of upstream prices, corporate profits, and fiscal revenue, the urgency of easing declines.
The exchange rate is the other side of the same coin...
In the Wrap three weeks ago, we put forward the logic that the renminbi’s exchange rate would be stabilized without moving in one direction...
For those who haven’t seen our views on USDCNH in this issue, 《WEEKLY WRAP 260301》, be sure to go back and read it. We remain positive on renminbi appreciation, but for those expecting the same pace of appreciation as over nearly the past year to continue, things may not look so favorable from here.In fact, the point we identified a few weeks ago turned out to mark a reversal low (the red circle indicated by the arrow in the chart below):
Chart: USDCNH (daily chart, as of 260322)
Over the past week, CNH traded largely between 6.87 and 6.91, while the daily fixing was also notably steady. The CFETS index was around 100.2 to 100.9, with 101 seen as resistance. More interestingly, exporters’ willingness to convert foreign exchange continued to rise in 1-2, and net foreign-exchange inflows in 2 still came to 440 hundred million U.S. dollars, with exporters’ monthly foreign-exchange settlement ratio at around 66%,indicating that the renminbi is not short of fundamental support.
The only issue is that, with oil prices, the dollar and external uncertainty all elevated, policymakers certainly do not want a sustained appreciation trend; they want a manageable, low-volatility exchange-rate environment. So the process ahead will still involve a stable daily fixing and two-way fluctuations.
Chart: For the renminbi, stability matters more than appreciation now; the daily fixing, countercyclical factor and volatility management are back at the center of attention
VI. Short-term risks lie in external demand; long-term opportunities do too
The impact of the shock on China’s external demand may be opposite in the short and medium term.In the short term, the most vulnerable economies are those with low inventories, limited fiscal room and heavy reliance on imported energy. See “260322 WEEKLY WRAP” and Notes260317 “Oil Prices Are Just the Opening Act; the Real Repricing Will Hit Growth, Exchange Rates and Industrial Supply Chains”》A significant share of the marginal contribution to China’s export growth in recent years came from low-income EM, and these economies are precisely the ones most likely to be weighed down by higher oil prices, fuel rationing and subsidy pressures. If they are forced to cut imports, China’s shipments to these markets are likely to be affected first.
Although China is relatively stable, many countries in the region have much less of a buffer in refined fuels, fertilizers, chemicals and electricity.
But if we take a slightly longer view, the outlook may not be so bleak.If this shock pushes countries’ policy priorities back toward energy security, subsequent capital expenditure will shift toward power-generation equipment, power grids, energy storage, electric vehicles and batteries...
From 2019 to 2025, China’s actual output of new-energy vehicles, solar cells and power-generation equipment grew by 240%, 340% and 1080%, respectively, Once overseas markets start investing in both energy security and the green transition, China may actually reap greater benefits from external demand after 2027.So China is not facing a one-way negative shock. Rather, it is more likely to be weighed down first by global demand and vulnerable EM in the short term, then recoup some incremental growth from energy-security investment in the medium term.
Chart: Vulnerable economies will weigh on external demand in the short term
Chart: But if countries double down on energy security in the medium term, China’s supply capacity in new-energy vehicles, batteries and power-generation equipment may benefit
This is also the core source of medium-term tradability.
These sectors can be expected to continue leading market activity over the next 3-6 months..
VII. Cross-checking the various threads
Overall, in my view, China is now trading more on a complex scenario of “partial insulation, partial benefit and partial delay” than on a simple positive or negative story.In aggregate, China is more stable than most Asian importing economies. On prices, the PPI deflator is recovering first, while pass-through to CPI and core inflation is limited. On policy, exchange-rate stability takes priority. By sector, upstream industries benefit while downstream profits are squeezed. For external demand, the short-term question is the import capacity of vulnerable emerging markets, while the medium-term question is whether energy-security investment will once again amplify China’s supply advantage.
Friends, you can keep a close eye on the following threads:
1) After PPI turns positive, will downstream margins deteriorate noticeably?
2) Will RMB stability be accompanied by a continued rise in the foreign-exchange settlement ratio, rather than being sustained through stronger intervention?
3) Can improving high-frequency physical demand for commodities such as copper spread from one or two products to a broader industrial chain?
4) Will external demand pressures fall on Asian manufacturing chains, or on import demand from low-income EM?
If all these trends move in an unfavorable direction at the same time, China’s current recovery will return to the old problem of “insufficient growth.” Conversely, if they all produce positive results, the Chinese market will remain a relatively strong outperforming bet.
Figure 8: Foreign-exchange inflows and exporters’ willingness to settle foreign currency continue to improve, suggesting that RMB stability does not depend entirely on administrative management and still has underlying fundamentals supporting it.
So, more accurately, China is not now facing a typical stagflation shock in line with Europe and the United States. Rather, this is a repricing characterized by a greater emphasis on nominal recovery, an upstream-first sequence, a later policy timetable, and a reshuffling of industry rankings. It will not immediately drag China into a recession trade, but it is enough to bring the market’s previous, purely upward-trending trading framework to a halt.
A new trading rhythm has begun.
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