The bizarre sight of China’s President Xi calling for Western central banks to hold off on monetary policy tightening illustrates how the Chinese economy, and perhaps Xi’s position itself, is a lot weaker than commonly assumed.
Xi has only one ambition in 2022 and that is to be reelected by the Party Congress late this year to a third term as head of China’s Community Party and its government. Even though it is considered a shoo-in, there’s 10 difficult months from now until the vote.
The Chinese economy is stuttering not because of global demand, but because of the policies of Xi and his regime, across multiple fronts.
Xi’s “common prosperity” agenda is a return to more traditional Chinese Communist Party state control in key sectors like big tech and education and the harsh application of laws to regulate private enterprise and public morality (though not for the billionaire princeling class running China) — all while it deals with the consequences of stimulating a property boom to avoid a slowdown back in 2015 and 2016.
That property boom is imploding because the rising debt burden it was creating was becoming too much of a threat to Xi’s government. Evergrande, China’s second biggest developer with more than US$300 billion in mostly domestic debt (external debt is an estimated US$28 billion), was allowed to drift and then head towards collapse late last year before being pulled back and a de-facto takeover ordered because of the threat to the financial system.
Xi’s government has been working to free up more cash in the Chinese financial system by lowering bank reserve asset ratios and interest rates, with the aim of injecting over US$500 billion into the economy by the end of February. That’s not for funding new loans or increasing investment, but helping to repay short term loans and prevent the property sector inflicting more damage on the financial system.
Chinese real estate investment in December plunged 13.9% from a year earlier, compared with November’s 4.3% decline, data from the National Bureau of Statistics showed. New construction starts as measured by floor area also contracted in 2021, 11.4% — worse than the 1.2% decline recorded in 2020, and it’s accelerating.
Home sales by volume rose 5.3% over the course of 2021 — but that’s compared with a 9.3% gain in the January-November period. Home price growth has also been declining since May last year, and prices actually fell in November and December. As we know from the Australian experience, falling house prices can have significant impacts on consumer sentiment and demand. The Reserve Bank of Australia estimates property accounts for around 60% of household assets in China.
Problems in China’s energy sector at least have stabilised — but only after the government landed 700,000 tonnes of previously banned Australian thermal coal. Domestic coal production also surged to hit record monthly totals in November and December and for the year as a whole.
But now COVID-19 is back to haunt Xi and his strict control and elimination approach to the virus as more than 200 million Chinese plan to move across the country for the Lunar New Year (February 1) and associated 40 days of holidays. That includes the flagship Beijing Winter Olympics starting February 4. Xi has locked himself into a zero-COVID policy, which is already being tested by the Omicron variant.
The one area of continuing success for the Chinese economy is exports — China hit a new record for exports in 2021 and for 15 months in a row up to last month (so much for the “supply chain crisis”).
But Xi currently has little else going for him: domestic demand in China is weak — retail sales have hardly moved since mid-year, and growth in imports slowed noticeably at the end of 2021. That’s why he needs Western consumers to go on spending furiously — and Western central banks to hold off on anything that might discourage them.
Interesting article Glenn and Bernard! China is one area that we certainly do not want to take our eyes off for a moment. I would not want to be so bold as to even try to predict how things will play out. But lets hope that it is will be in the best interests for all.
All this goes to show that China cannot easily afford too many enemies, a factor that our dopey government should realise. instead of going out and getting a bloody nose (instead the US) with their tub thumping Washington’s Words, we should be speaking sensibly and building the other friendships. Instead we lose trade which the US snaps up instead of us. Who needs enemies?
I suspect that as a whole China would be better off with this belligerent despot as its leader.
Weaker . . . and therefore of greater risk! Guess the range of possible diversions?
Reading between the lines China is still doing much better than the rest of the world.
Depends which people in China you are talking about.
They are. 8.1% Growth in 2021 with not much in the way of inflation. I see the risk as far lower than 2008 when US Capitalism nearly beggared the world. Borrowings around the world are off the chart (with the US being the largest Debtor by far and China one of their largest creditors). Rising interest rates will result in falls in both Equity Markets and Bond Values.
China has steered their economy well over the past 40 years but Evergrande has shown the dangers of leaving capitalism unchecked. Housing is way overvalued in China (worse even than Australia where the ongoing love affair with property is insane) and something had to be done as most of the activity was purely speculative. I expect that there will be further turmoil but that it will decline to sustainable levels rather than collapse. As to what happens in the rest of the world, QE has changed the game worldwide and nobody knows how this will end TBH. 2008 anyone?
Australia’s bricks and mortar investment culture was part of my childhood programming. The certainty of a visibly tangible, income producing, appreciating asset, well what is not to like about that? Compared to the scary monster called equities.
What percentage of the population was influenced by the board game monopoly, aka, introduction to capitalism for all the family 101. Look at all the lessons there:
Own property or fail,
Owning an apartment block provides a much better ROI than just one or two units,
Monopolise the utilities for a steady earner,
Despite equality of opportunity, winners and losers are decided by a combination of luck, right place right time, strategy, and fortune of other players to name just a few factors.
And what did we all hang out for? Going past go and collecting our UBI.
And what happened when the bank ran out of money?
The only QE the central bank had was to ask the rich players to hand back some of the loot that we essentially stole through price fixing. All within the rules of the game which we changed to suit ourselves.
And I learnt, the better I negotiated, the better I would do. Collusion worked. Depriving the central bank of income by forming a cartel with all the non bank players and refusing to pay interest worked. Enough to get rich, but it did end the game more quickly.
And critically,
The game only works if everyone gets paid to play by the central bank.
The playing field doesn’t stay level for very long.
It’s not long until rent payers feel like the game isn’t fair and lose interest because it favours those with enough capital and cashflow to accumulate property by doing deals. Nothing in the rules about scruples.
So what was that about our obsession with property? Can you explain what impact mortgage backed securities loaded with sub-prime mortgages have on the risk profile of 15 year debentures. Yeah, nah, neither can I.
Warren Buffett, one of the most successful & canny of investors – and humane, for the species – looked into the CDOs long before they blew the gaskets on the US financial system and wouldn’t touch them with proverbial barge pole.
The weird thing is that anyone with a $5 calculator, or basic arithmetic, could see the same fallacy (phallusy?) but not the wildly overpaid, so-called “smartest guys in the room”.
Just like the LTCM – the shonks won a Nobel prize for Economics in 1997 then it collapsed less than a year later through the sheer absurdity of the scam..sorry, scheme.
But hey, all the economists thought it was just spiffing, no problems with the theory – it was reality that was at fault.
Unfortunately, not being Hitchhiker’s Guide to the Galaxy, they couldn’t sue reality.
Equities are not scary in the slightest to me but debating different asset classes and the Pros and Cons of same wasn’t the point. Both Australia and China have an exceptionally unhealthy attachment to property. Low interest rates combined with Negative Gearing (and Capitalisation of interest under various mortgage reduction schemes) has resulted in speculation which has raised property prices (and this affordability) in both Countries which China, at least, is trying to reduce and make property more affordable. It has however had economic consequences.
China has today eased interest rates while the majority of the rest of the world are looking to raise them. Inflation in Australia and the West is rising quickly and this will indeed impact affordability. Combine that with some of the efforts in Australia to reel in borrowings to Investors and you will have scenario where property values will decline. In short, the market is overheated and most likely headed for a long-overdue correction (at least here). When I start hearing real estate “tips” from Joe Blow in the street I can only think of 1987.
As to how mortgage backed securities loaded with sub-prime mortgages impact the risk profile of 15 year debentures, that’s easy. Adding sub-prime mortgages into Collaterised Debt Obligations what were sold as Prime CDO’s fundamentally changed the Risk Profile (think a bundle of 10 mortgages with only two of them Rated as Prime and 8 as Sub-prime instead of 10 Prime) of that CDO. Two proximate causes were the rise in subprime lending and the increase in housing speculation.
There was a perfect storm. There was a Housing Bubble in the US (Ala both Australia and China) which popped leading to mortgage delinquencies, foreclosures, and the devaluation of housing-related securities. Debentures are not Bonds, are unsecured (not capital guaranteed) and are issued by private companies including Lenders. Securities backed with mortgages, including subprime mortgages, widely held by financial firms globally, lost most of their value and raised the Risk Profile of Debentures.
Whenever you start seeing investment recommendations from Joe blow in any Asset Class, it’s time to look at reducing your exposure to that Asset Class. The amount of pushing for Craptocurrency that I see everywhere scares the hell out of me too.
BTW. No Asset Class increases every year without fail, they all rise and fall. Property is subject to irregular adhoc “valuations” and, like everything, is only worth what someone is willing to pay. I have had investment properties but made far more in equities with the added benefit that they are easily liquidated if you have cash flow problems. Negative Gearing can also be used with equities with the added advantages of dramatically lower acquisition, ongoing and sale costs. By the time you factor these into the equation you may receive a shock as to what your ROI is on a Discounted Cashflow Basis.
There is no single magical Asset Class.
I look forward to the, barely implied, suggestion/threat that China may need to sell off (some of) the $2Trillion of US T-Bonds it so generously took off the penurious Benighted States books, just to help their war machine further alienate the rest of the world.
China has been recklessly governed for decades and Jinping cannot get the country back on track without a lot of broken glass. If he had not acted, the crash would have occurred a few years later and been much worse. But the whole world needs to get its act together in the face of global heating. Each country needs to implement a Project Cybersyn to ensure social, economic and environmental wellbeing.
I wouldn’t say “recklessly governed for decades” more like “catching up with the rest of the modern world at such a pace that Governance did not keep pace with change”. The West has had decades longer to put controls in place (quite often after a massive failure has identified the risk) so, all in all, they have done a fair job under the circumstances.