Chinese Economics Thread

[AndrewS]

Add 1% growth from low productivity workers with primary school degrees retiring being replaced with university graduates. Another 1% for some of the 25% of the Chinese population $0 GDP per capita farmers becoming urban workers with average GDP per capita. Add another 1% for technological upgrading, improving per worker productivity with robots. There's still a huge amount of inefficiencies that will fuel trend growth. Anything that the government does is just on top.

I'd expect growth to be high enough that stimulatory policies will be withdrawn again to save up dry powder for the less certain 2024, when we might see some big infrastructure spending again

Yeah, there are excess savings valued at 25% of GDP and a large chunk of this will be spent after the COVID waves passes in the next 2 months, as everyone was stuck at home before.

There should be more than enough stimulus that additional government spending is not required in 2023

 

[ZeEa5KPul]

It looks like the government is really ending its attack on Chinese software companies?

Who said the government was attacking Chinese software companies?

 

[TK3600]

China ride-hailer Didi says it can register new users again

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Thank God. Didi is an innovative and job creating company that is one of the few to go toe to toe with Uber worldwide. It looks like the government is really ending its attack on Chinese software companies? If so, they only have the US govt to contend with.

Between this and the end of the Australian coal ban, it seems the Chinese govt has gotten more economically rational in the past few months. That's good news for the economy as long as it lasts.

Rent seeking is not innovation. Have they actually used the vast profit for something innovative like autonomous driving? They got slapped because they tried to list in US and share sensitive information. They were rightfully punished.

 

[AndrewS]

Just my opinion, the real drivers of today's Chinese economy are the following.

1) Entrepreneurship which is buttress by high growth numbers, which fuels a self-feeding loop. Chinese people are cheap. We like money, and we want to make some more!

2) Urbanization. The central government been saying that for a long time, and it is true, that mega-urban clusters are a real driver for growth, and innovation.

McKinsey published this report over a decade ago on China's Urban Billion, which is still relevant.
It goes into some detail on the optimal urban clustering strategy

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[gadgetcool5]

Rent seeking is not innovation. Have they actually used the vast profit for something innovative like autonomous driving? They got slapped because they tried to list in US and share sensitive information. They were rightfully punished.

Sure they have.

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The success of Chinese companies in new fields like ride hailing apps is a good thing, and innovative. I don't really get the hate for Chinese software. It seems like the one thing PRC nationalists and China hating US govt officials could agree on until recently. But it seems like Xi Jinping has woken up, so that's what matters here.

 

[abenomics12345]

Give me a break. If you are so good at predicting future economic performance you would be on a yacht somewhere in the Caribbean instead of arguing with someone like me.

The field of economic studies is all guess work. Micro-economics may have some use since the focus is small. Macroeconomics is more faith-based than actual science.

FYI, our family do have a stake in Chinese property market.

My job requires that I be approximately right - how I feel about my estimates is irrelevant - but it occurs to me that you are more interested in venting how you feel than debate the numbers.

What is the contribution of this housing renovation program you talk about? This is the 3rd time I'm asking you - which part of my question do you not understand? I can repeat the question in Chinese and French if you understand those languages better. Let me know.

The big growth drivers I see for China in 2022

1. $4.8 Trillion in excess family savings from 2020-2022, as per the FT

That works out as 31 Trillion RMB of potential consumer spending.
In comparison, you have a 2021 figure of 44 Trillion RMB for total retail sales.

Hence your 8% retail spending growth is way too low.

If only one-fifth of those excess Chinese savings are turned into retail sales, that an extra 6 Trillion RMB (15% of retail sales growth)

Ditto, if one-fifth of excess Chinese savings are put into real estate or renovations, that is 6 Trillion TMB. That compares to the 20 trillion RMB figure

Then you still have the other three-fifths left from those excess savings


2. Polysilicon capacity expansions for 2022-2023-2024-2025. Running at approx 1 million tonnes per year, as per BNEF and others

That works out as up to 350GW of solar panels being dumped into the Chinese and overseas markets.
That will drive down the costs of solar significantly from current high levels.
Total solar farm investment required would be approx $350 Billion ( 2 Trillion RMB), bearing in mind the caveats above

Remember that solar is already the lowest cost electricity in many places.

Housing is for living, not for speculation. - Xi Jinping

If you read the book Structural Reform by Huang Qifan (he was part of the Expert Committee that set the Comprehensive Deepening Reforms as part of the 3rd plenum of the 18th CPC Party Congress) - he lays it specifically how and why real estate will be sustainable at 1bln sqm/year (vs a peak of 1.6bln sqm in 2021) over the long term. Any discussion of Chinese economics with the assumption that "real estate will go back to where it was before" is laughably unrealistic - especially if you actually paid attention to the policies rolled out to deflate the exact problem.

80% of square footage and 60% of the value of Chinese real estate is being sold in Tier 3 and below - and as urbanization continues that is the last place young people want to go to are third tier cities with an excess of apartments (Hegang being the widely cited example).

The problem with Chinese real estate (not my words, but policymakers) is that there is an excess of apartments and a shortage of apartments at the same time - mismatch at the wrong places. One can buy an apartment in Hegang for 100k RMB - and one can buy a single sqm of apartment in Tier 1 cities for the same amount.

So why aren't people moving to Hegang? The city is so close to bankruptcy that they shut down heating this winter because the municipal heating company ran out of cash to buy heating coal. This is the result of cities investing heavily in non-productive roads/bridges by borrowing unsustainable debt - and the central government decided to put a stop to this.

As such, the government wants real estate to be a drag, not a boost to the economy as it had been for the first 21 years of the 21st century. Like sure, if the notion you're presenting here is that the central government should hire 20mln people to build more empty apartments in Hegang to get people paid, then sure you are going to solve the immediate income problem but the debt bubble will be inflated even more - and if you read the readout of the CEWC transcript the Politburo specifically talks about preventing financial risks. Real estate drag is feature, not bug.

If you are suggesting real estate FAI will be 20trln in 2023 - you are literally calling for the return to speculation of real estate and suggesting that the central government/Xi Jinping doesn't know what they're doing by reigning back real estate. While this assertion might be factually accurate, I don't know how you can be bullish the country if you think the central government and head of state doesn't know what they're doing with reforms they've been carrying out since 2013.

Like I've said, majority (~80%) of excess deposits is not as a result of 'people not being able to consume' but rather as a result of increased propensity to save as a result of reduced income expectations and reduced willingness to buy properties (hence weak credit demand / TSF data). In fact, if you decompose the numbers, in rich provinces like Jiangsu/Zhejiang, savings rate is actually lower than trend before pandemic - meaning that they have saved *less* than they otherwise would've. Majority of that 'excess deposit' are in poorer regions that are worried about future economic prospects.

Put this very simply - if you saved up an extra 10k last year but you're worried about losing your job in 2023 - you are not going out there to spend it all, let alone buying a new apartment. Rather, people saved up because they are worried about your job prospects and deferring apartment purchase/marriage/childbirth. You are mixing the independent/dependent variables in your assertion here.

If someone here has a magical plan to revitalize the economy of the Northeastern provinces, give the Politburo a call - they're quite interested in figuring it out.

2trln RMB over 4 years is yawn inducing - not going to move the needle - not to mention that not all of that 2 trln is GDP because of imported raw materials / energy necessary to manufacture polysilicon ingots.

Meanwhile, net exports in 2022 contributed to ~1.5 trln to GDP - this is with a depreciating RMB in 2022 vs appreciating RMB in 2021 - (Meaning FX contribution will be a drag in 2023 vs 2022). 2023 Exports will be lower than 2022 and Imports will be higher (as a result of retail sales / consumption growth)

So heading into 2023 - there will be more than a 1.3% drag already just from net exports being down as opposed to being up 1.5 trln.




Look - I don't make up the numbers - arguing about this is akin to US think tanks arguing about the sUpErIoRiTy of US Navy in the 1st island chain - its just ludicrous.

 

[AndrewS]

Housing is for living, not for speculation. - Xi Jinping

If you read the book Structural Reform by Huang Qifan (he was part of the Expert Committee that set the Comprehensive Deepening Reforms as part of the 3rd plenum of the 18th CPC Party Congress) - he lays it specifically how and why real estate will be sustainable at 1bln sqm/year (vs a peak of 1.6bln sqm in 2021) over the long term. Any discussion of Chinese economics with the assumption that "real estate will go back to where it was before" is laughably unrealistic - especially if you actually paid attention to the policies rolled out to deflate the exact problem.

80% of square footage and 60% of the value of Chinese real estate is being sold in Tier 3 and below - and as urbanization continues that is the last place young people want to go to are third tier cities with an excess of apartments (Hegang being the widely cited example).

The problem with Chinese real estate (not my words, but policymakers) is that there is an excess of apartments and a shortage of apartments at the same time - mismatch at the wrong places. One can buy an apartment in Hegang for 100k RMB - and one can buy a single sqm of apartment in Tier 1 cities for the same amount.

So why aren't people moving to Hegang? The city is so close to bankruptcy that they shut down heating this winter because the municipal heating company ran out of cash to buy heating coal. This is the result of cities investing heavily in non-productive roads/bridges by borrowing unsustainable debt - and the central government decided to put a stop to this.

As such, the government wants real estate to be a drag, not a boost to the economy as it had been for the first 21 years of the 21st century. Like sure, if the notion you're presenting here is that the central government should hire 20mln people to build more empty apartments in Hegang to get people paid, then sure you are going to solve the immediate income problem but the debt bubble will be inflated even more - and if you read the readout of the CEWC transcript the Politburo specifically talks about preventing financial risks. Real estate drag is feature, not bug.

If you are suggesting real estate FAI will be 20trln in 2023 - you are literally calling for the return to speculation of real estate and suggesting that the central government/Xi Jinping doesn't know what they're doing by reigning back real estate. While this assertion might be factually accurate, I don't know how you can be bullish the country if you think the central government and head of state doesn't know what they're doing with reforms they've been carrying out since 2013.

I agree completely. My previous estimate was that new housing construction in China needs to roughly halve in size.

But look at what I actually wrote. A notional 20% of excess savings (6 Trillion RMB) spent on new housing and renovations, which is the key element.
There are still a lot of apartments left as empty concrete shells, because then they can still be sold as new apartments rather than lower-value 2nd hand apartments. I disagree with this way of thinking, but it's what the market believes.

But if expectations of future housing price appreciation are muted/stable, then much of this existing stock will come to market, whether it is sold to an owner-occupier or furnished so that it can be rented out.

So what I am saying is that housing and housing renovations will see some sort of recovery in 2023 compared to 2021/2022

Like I've said, majority (~80%) of excess deposits is not as a result of 'people not being able to consume' but rather as a result of increased propensity to save as a result of reduced income expectations and reduced willingness to buy properties (hence weak credit demand / TSF data). In fact, if you decompose the numbers, in rich provinces like Jiangsu/Zhejiang, savings rate is actually lower than trend before pandemic - meaning that they have saved *less* than they otherwise would've. Majority of that 'excess deposit' are in poorer regions that are worried about future economic prospects.

Put this very simply - if you saved up an extra 10k last year but you're worried about losing your job in 2023 - you are not going out there to spend it all, let alone buying a new apartment. Rather, people saved up because they are worried about your job prospects and deferring apartment purchase/marriage/childbirth. You are mixing the independent/dependent variables in your assertion here.

Yes, people saved last year because they were afraid. You can see it in the consumer confidence numbers below.
But now the dominant media narrative is that COVID is/will be defeated.
And it looks like they've already reached herd immunity in the cities.
So there has been a political decision to declare complete victory over COVID and increase consumer confidence in the population and therefore income expectations.

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Currently consumer confidence is still muted because of COVID, but after Chinese New Year, it's going to explode upwards and return back to normal levels

That initial boost in spending (from consumers and presumably the government) will drive a virtuous cycle in terms of business investment, more consumer spending, government receipts, stock market valuations etc etc

If someone here has a magical plan to revitalize the economy of the Northeastern provinces, give the Politburo a call - they're quite interested in figuring it out.

2trln RMB over 4 years is yawn inducing - not going to move the needle - not to mention that not all of that 2 trln is GDP because of imported raw materials / energy necessary to manufacture polysilicon ingots.

The solar polysilicon investment numbers would actually be:

2022: Base Year
2023: 2 Trillion RMB additional investment required (1 million tonnes extra annual capacity if fully-utilised)
2024: 4 Trillion RMB additional investment required (2 million tonnes extra annual capacity if fully-utilised)
2025: 6 Trillion RMB additional investment required (3 million tonnes extra annual capacity if fully-utilised)

Again, the caveat is that this will be split between China and overseas.
Plus someone has to come up with the large upfront investment in exchange for low-cost electricity for the next 30 years.

The impact of imported materials/energy to manufacture polysilicon is overstated.
The raw material for polysilicon is literally sand and the energy requirement is electricity, which is generated from domestic Chinese sources.

 

[PiSigma]

Yes, I discussed this in another thread I think.

Quite an interesting move here. They are opening up several refineries (recently signed agreement with Saudis). In return for importing more oil, they are also exporting more refined oil

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so they are appearing to take advantage of access to cheap oil from Russia and Iran.

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new refineries opening.

What this imo does is:
1) Increases its position as the world's largest oil importer and gives it negotiating power vs all exporters
2) Gives them flexibility to import more if exporters meet their demand since they don't actually need to export refined oil product
3) That flexibility could be used to encourage greater usage of RMB settlement and their own energy trading exchanges/platforms.
4) Create jobs for refineries that can then make huge profit on export of gasoline & diesel

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5) Cause refineries to go out of business in other countries since they won't be able to compete on pricing. Note that America is China's biggest importer of diesel oil. Of course, other countries could see lower refinery capacity for different reasons.

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There is another benefit you forgot to mention. Since refined oil products are globally traded but also limited in supply (most are used internally), this give China a much stronger hand in controlling the political actions of buyers.

Good luck pissing China off if there is no diesel.

 

[AndrewS]

@abenomics12345

The key point is whether you agree that Chinese family savings are $4.8 Trillion higher than pre-pandemic, as per the FT/Nikkei.
If you don't agree, then perhaps you can drop a note to James. You'll probably get a response.

---

Such a figure represents 25% of Chinese GDP. If you compare this to other countries, you can see this is twice next highest country, namely the USA at 12%. See below.

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I notice that Japan only had 4% extra savings during the pandemic, so Japan wouldn't have seen what a post-COVID spending boom looks like.

The article also shows the sharp explosive increase in consumer sentiment that happens post-COVID

 

[abenomics12345]

I agree completely. My previous estimate was that new housing construction in China needs to roughly halve in size.

But look at what I actually wrote. A notional 20% of excess savings (6 Trillion RMB) spent on new housing and renovations, which is the key element.
There are still a lot of apartments left as empty concrete shells, because then they can still be sold as new apartments rather than lower-value 2nd hand apartments. I disagree with this way of thinking, but it's what the market believes.

But if expectations of future housing price appreciation are muted/stable, then much of this existing stock will come to market, whether it is sold to an owner-occupier or furnished so that it can be rented out.

So what I am saying is that housing and housing renovations will see some sort of recovery in 2023 compared to 2021/2022




Yes, people saved last year because they were afraid. You can see it in the consumer confidence numbers below.
But now the dominant media narrative is that COVID is/will be defeated.
And it looks like they've already reached herd immunity in the cities.
So there has been a political decision to declare complete victory over COVID and increase consumer confidence in the population and therefore income expectations.

Please, Log in or Register to view URLs content!

Currently consumer confidence is still muted because of COVID, but after Chinese New Year, it's going to explode upwards and return back to normal levels

That initial boost in spending (from consumers and presumably the government) will drive a virtuous cycle in terms of business investment, more consumer spending, government receipts, stock market valuations etc etc



The solar polysilicon investment numbers would actually be:

2022: Base Year
2023: 2 Trillion RMB additional investment required (1 million tonnes extra annual capacity if fully-utilised)
2024: 4 Trillion RMB additional investment required (2 million tonnes extra annual capacity if fully-utilised)
2025: 6 Trillion RMB additional investment required (3 million tonnes extra annual capacity if fully-utilised)

Again, the caveat is that this will be split between China and overseas.
Plus someone has to come up with the large upfront investment in exchange for low-cost electricity for the next 30 years.

The impact of imported materials/energy to manufacture polysilicon is overstated.
The raw material for polysilicon is literally sand and the energy requirement is electricity, which is generated from domestic Chinese sources.

2023 as a flat year vs. 2022 in terms of real estate FAI will be a good year end result - because keep in mind the numbers for 2022 continued to deteriorate as the year dragged on, so Dec data is worse vs Jan. 1H will be worse and 2H will see a recovery, but the FY2023 numbers will not be great.

There are some 600 projects in China that had consumers stop paying mortgages in July - most pronounced in Zhengzhou - I actually spoke to someone as a part of the team in charge of fixing the problem there and lets just say this will take time to flow through.

I think you're conflating what will happen *IF* consumer confidence comes back overnight with what *is likely* to happen. Mathematically what you are getting is possible but that isn't a base case scenario. The alternative data I track on restaurants and mobility would suggest a strong recovery but not nearly back to 2019 levels. The "Stuff to Service" shift is happening here as well.

The recovery is not going to be nearly as explosive as we saw in the DM because all the subsidies in China were given to the 'supply side' and virtually none given to the 'demand side'. The rich people aren't impacted, but keep in mind MPC is much lower for rich people than it is for poor people.

Also keep in mind, if your argument is that retail sales will be stronger, then net exports in 2023 will mathematically be weaker. You can't have it both ways here. Additionally, outbound travel will further erode net-exports - as the Top 10% of people in China with passports go to HK/Macao/Japan/Korea/Thailand.

If you were an employee of a small restaurant that went out of business during COVID - you'd like to find work and buy things but it takes time for these SMEs to come back - it's not going to happen overnight. This is a gradual process - especially given the constraint on housing/infrastructure as an avenue of government stimulus that is no longer available vs in 2016/2008, respectively. Local governments are no longer able to borrow the amount they did in 2008 to boost infrastructure spending. Meaning fiscal credit impulse in 23 will be lower vs. 22, despite being significantly higher vs. 2020/2022.

As the subject of discussion is 2023 GDP - numbers beyond that is not really part of the discussion.

Can you break down the composition of solar investment? Not all of it will be counted as GDP (importing energy to make silicon ingots isn't all added to Chinese GDP - what is the *value added* portion of that investment?) - quoting a number like that without decomposing that is really not persuasive.

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In 2022 China added 120GW of Wind + Solar. The target set by the National Energy Administration literally 2 weeks ago between wind and solar in China is 160 GW for 2023.

Globally, BNEF expects 2023 to be 315 GW of solar addition (vs. 268 GW in 2022) - if you are saying all of that 350 GW of capacity coming online in 2023 - wafer prices will compress some much that part of supply chain will go bankrupt.

What you are doing here is conflating supply addition with demand generation - just because China is building capacity doesn't mean people will use said capacity. And just because people use that capacity, doesn't mean that prices won't deflate as a result of significant oversupply.

We saw this movie in Aluminum and Steel, and we are watching this happen in real time with lithium battery capacity in 2023 - and we are about to see it happen with solar wafers.