Chinese Economics Thread

[Michaelsinodef]

Who said that China doesn't care about the stock market?

They just don't care to the extent that rent-seekers and Western capital would like them to care.

The stock market was a very positive economic invention overall. Just like capitalism.

But even good things can be done in extremes to become bad things.

Just like how we see today in some other countries.

The world is not black and white, the truth is often in between.

Eh.

I honestly think the debate is still up in the air about how 'good' the stock market actually is.

As usually, only the positives of it are highlighted while mostly ignoring or downplaying the negatives.

Not to mention, it's overall role in China (where I think the judgement really is up in the air).

 

[Serb]

Eh.

I honestly think the debate is still up in the air about how 'good' the stock market actually is.

As usually, only the positives of it are highlighted while mostly ignoring or downplaying the negatives.

Not to mention, it's overall role in China (where I think the judgement really is up in the air).

I think that @abenomics12345 made some good points about why the stock market was overall important in the past and why it's bad to have such downturns.

Although I don't agree with him about the extent to which he thinks it's good to put focus and emphasis there, nor how high should it end up fundamentally.

I think these recent efforts from Chinese officials are more so about dealing with the current downturn and return stability, as opposed to some strategic direction change.

The real economy will still remain the king in China, and this is just dealing with a massive attack on the Chinese equity markets driven by foreign efforts.







Edit: Anyway, from what I gathered they (CSRC) strongly warned against malicious short-sellers and vowed zero-tolerance toward them (mainly institutional investors), threatening them with jail, and also started to inject more buying into equity markets from state-linked investors. And when they say something like this, they mean it, and they have the power to accomplish it. This is how a real country behaves against its parasitic financial speculators and market manipulations by the way. I think now would be the best time to buy on the Chinese stock market, it bottomed it seems.

 

[abenomics12345]

I think that @abenomics12345 made some good points about why the stock market was overall important in the past and why it's bad to have such downturns.

Although I don't agree with him about the extent to which he thinks it's good to put focus and emphasis there, nor how high should it end up fundamentally.

I think these recent efforts from Chinese officials are more so about dealing with the current downturn and return stability, as opposed to some strategic direction change.

The real economy will still remain the king in China, and this is just dealing with a massive attack on the Chinese equity markets driven by foreign efforts.


Edit: Anyway, from what I gathered they (CSRC) strongly warned against malicious short-sellers and vowed zero-tolerance toward them (mainly institutional investors), threatening them with jail, and also started to inject more buying into equity markets from state-linked investors. And when they say something like this, they mean it, and they have the power to accomplish it. This is how a real country behaves against its parasitic financial speculators and market manipulations by the way. I think now would be the best time to buy on the Chinese stock market, it bottomed it seems.

To be crystal clear, I am not saying the CSI300 needs to produce 15% CAGR like the S&P500 - the latter is representative of

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& underinvestment in critical industries (Boeing, GE to name a few).

That being said, the stock markets should produce returns similar to GDP-returns (if income & return on capital grows at the same rate, then inequality does not get out of hand the way Piketty describes it) in a purely domestic sense, and should generate higher than GDP returns to the extent China continues to capture higher parts of the smile-curve (services, patents/IP, standard setting etc) as it outsources low-end manufacturing to ASEAN.

While you are absolutely correct that the stock market/capital market at large was not important in China's growth trajectory til today, it absolutely will be important going forward.

The problem today is that people have a lot of excess cash sitting in a deposit account or in a GIC earning 2% a year, and have nowhere to put it. This is not an efficient capital allocation strategy. The worst part of the current situation is that the bank then turns around and gives that to a LGFV which then invests in a 1% return road to nowhere. Some of these roads are effective, but lots of them are also built just for local officials to skim the grease.

Meanwhile, private companies are resorting to using loans from loan sharks or expensive leasing companies (There is a Taiwanese company called Chailease that makes 10-15% returns on leases they give out) to buy equipment and expand capacity. This should not be happening in an efficient capital market and is not good for the country!

You should think of the capital market as a matching algorithm that allows willing providers of capital and takers of capital to figure out the right price for capital (interest, or rate of return).

This is precisely why it is important to have a direct-financing mechanism as opposed to the current indirect-financing mechanism going forward. Reducing the role of the banking system also allows people to directly raise money and improves diversification of the financial system + reduces leverage for the system at large.


Put in simpler terms, financial repression has helped historically (Stiglitz effect), but it has been causing more harm (Mackinnon effect) than good in the past 7-10 years, and will cause even more harm than good in the future:

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To summarize, I will quote the great Liu He:

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[abenomics12345]

You should think of the capital market as a matching algorithm that allows willing providers of capital and takers of capital to figure out the right price for capital (interest, or rate of return).

As I just thought about this, the analogy I would give is:

Imagine if you were trying to buy a car, but instead of going to BYD to buy the car directly, the car company has to give all their cars to a centralized car dealing company and then for the car buyer has to apply for the dealing company to give them the car. This centralized car dealing company is responsible for pricing they charge the car makers and the price they sell to the customers.

Not very efficient is it!

Obviously, not everyone should be allowed to make and sell cars (safety, after-sale maintenance etc.), but the market is pretty damn good at figuring out which car company is good and which one is pretty garbage, and car companies are pretty damn good at figuring out what features customers need - and while the state can certainly play/compete here (Dongfeng etc) nobody would suggest that the state be responsible for all aspects of car sales.

 

[hereforsemithread]

To be crystal clear, I am not saying the CSI300 needs to produce 15% CAGR like the S&P500 - the latter is representative of

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& underinvestment in critical industries (Boeing, GE to name a few).

That being said, the stock markets should produce returns similar to GDP-returns (if income & return on capital grows at the same rate, then inequality does not get out of hand the way Piketty describes it) in a purely domestic sense, and should generate higher than GDP returns to the extent China continues to capture higher parts of the smile-curve (services, patents/IP, standard setting etc) as it outsources low-end manufacturing to ASEAN.

While you are absolutely correct that the stock market/capital market at large was not important in China's growth trajectory til today, it absolutely will be important going forward.

The problem today is that people have a lot of excess cash sitting in a deposit account or in a GIC earning 2% a year, and have nowhere to put it. This is not an efficient capital allocation strategy. The worst part of the current situation is that the bank then turns around and gives that to a LGFV which then invests in a 1% return road to nowhere. Some of these roads are effective, but lots of them are also built just for local officials to skim the grease.

Meanwhile, private companies are resorting to using loans from loan sharks or expensive leasing companies (There is a Taiwanese company called Chailease that makes 10-15% returns on leases they give out) to buy equipment and expand capacity. This should not be happening in an efficient capital market and is not good for the country!

You should think of the capital market as a matching algorithm that allows willing providers of capital and takers of capital to figure out the right price for capital (interest, or rate of return).

This is precisely why it is important to have a direct-financing mechanism as opposed to the current indirect-financing mechanism going forward. Reducing the role of the banking system also allows people to directly raise money and improves diversification of the financial system + reduces leverage for the system at large.


Put in simpler terms, financial repression has helped historically (Stiglitz effect), but it has been causing more harm (Mackinnon effect) than good in the past 7-10 years, and will cause even more harm than good in the future:

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To summarize, I will quote the great Liu He:

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Giving direct finance a larger share of total social financing isn't just a matter of pumping asset prices, because the reason that bank loans have taken such an outsized share of total financing is not a matter of poor valuations. The market exploded in 2015, but that did nothing to help alleviate the scarcity of capital for smaller firms, instead it was just a short-lived bubble that crashed shortly after and resulted in MOF spending a stupid amount of money resuscitating markets. Higher valuations will not automatically make it easier for smaller private firms to access direct financing and I do not understand why you seem to think there is such a straightforward relationship there, because frankly there just isn't.

The reason that neither wealthy households not private institutional investors in China have historically made stocks their main priority was because there was simply no reason to. Property offered stellar returns at a steady pace and very little risk, and the close relationship between developers and local governments' solvency meant that bailouts seemed and for a long time were basically guaranteed if anything went south. It was perfect. Why bother with extremely volatile equities traded in shady markets when you could already get everything you wanted from property? Stock markets could not develop in a healthy manner so long as they lacked an ample and steady inflow of low/moderate risk tolerant money. They would not get this flow so long as property was a one-way bet, and property's position in the Chinese fiscal system ensured that it would stay that way. Of course that was until the 3RL and subsequent years-long bloodbath in property.

Now property is no longer a one-way bet. Prices are stagnant or even declining in most parts of the country. So why are stock markets not booming? Well, can you tell me what asset class is the store of about 70% of Chinese household wealth? Can you then tell me how people tend to react when they experience a sudden and precipitous decline in wealth? People aren't investing in stocks because of negative wealth effects from property. Nobody is going to put money in a notoriously risky market when the mainstay of their wealth is depreciating, moreover, investors with losses in property are going to sell their stocks to try and pay any debts they took on in that business. All this means markets go down, a lot.

So when will this end? That depends on what 'this' you're talking about. If you mean when will property go back to its pre-3RL status quo, then never. That period is over. The industry will gradually consolidate over the next few years, with state firms taking on a more prominent role. The pace of construction will stay much lower than what was normal. Prices in lower tier cities will continue to decline for a while. The role of land sales in local government financing is being wound down and a new system based on RE taxes and public bonds will be gradually implemented over the next few years. If you mean when will wealthier Chinese households get the idea that they should consider putting more money in stocks (or bonds) now, then I don't really know, but I would not count on it happening particularly soon. The shock of land price declines will take a while to subside, and the bad reputation of stock markets will take a while to change.

It's for this reason that I just do not believe there will be any kind of bazooka stimulus; because it would be basically pointless. So long as wealthier Chinese are not willing to try investing in stocks, the only really firm floor for prices will be state funds. They can boost prices for a little bit, but any kind of sustained support would require just a ridiculous amount of money, and the risk of all that loose liquidity being used to interfere with Beijing's reforms by pumping land prices or recapitalizing irresponsible developers is unacceptable. Land prices have to decline and settle at a significantly lower level for the stock market to be able to serve its intended purpose, but staging a dramatic rescue of stocks at this moment would be counter to that goal. So they won't.

 

[abenomics12345]

Higher valuations will not automatically make it easier for smaller private firms to access direct financing and I do not understand why you seem to think there is such a straightforward relationship there, because frankly there just isn't.

I specifically said for stock markets to generate a reasonable rate of return, I never said anything about stock markets having high valuations. Those are two very different concepts that you should not conflate. As I said here:

Investing 101:

The present value of a stock is the cumulative sum of all future cashflows discounted to the present using an appropriate discount rate. As such, return of a stock equate to a combination of: dividends + earnings growth + change in the valuation (P/E ratio as a standard). Over the very long term, change in valuation should net out so return from a stock is a sum of dividend + earnings growth.

The valuation of a stock (the P/E ratio) can remain constant and the market can still generate good returns. Put simply, the price of the stocks I own can move all over the place, but as long as the dividends I receive are real and can live off of that, then I really don't care about the daily changes of the stock price.

Nobody is going to put money in a notoriously risky market

..and who's fault is that? The regulators f'ing suck if they allow shitty companies/shitty founders to swindle money from investors. Fix the regulatory mechanism and allow good companies run by honest people to raise money.

So long as wealthier Chinese are not willing to try investing in stocks, the only really firm floor for prices will be state funds.

No better solution for common prosperity than for the pension fund to load up at these basement prices - buy from wealthy Chinese dumping into the markets and give it to every employed person in the country via the pension plan. We've already started seeing Central Huijin buying.

The real money spent in 2015 was the shantytown renovations via PSL of the PBoC - it was clear that there were nefarious actors who hijacked the policy for their own good - if the bureaucracy is much cleaner (and less corruption) today, then this risk is moot point.

So when will this end? That depends on what 'this' you're talking about. If you mean when will property go back to its pre-3RL status quo, then never. That period is over.

I've been on this for over a year so yes I understand the implications of 3RL:

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.

 

[hereforsemithread]

The valuation of a stock (the P/E ratio) can remain constant and the market can still generate good returns.

You do not speak to me from a position of relative expertise. Do not passive aggressively quote definitions at me. I know what an earnings ratio is. I was using valuation to refer to the simple price per share. It is commonly used in this context.

I specifically said for stock markets to generate a reasonable rate of return, I never said anything about stock markets having high valuations. Those are two very different concepts that you should not conflate. As I said here

And I said that rescuing stocks in this moment would impede the markets ability to deliver a stable rate of return in the future due to the relevant property issues, a point you have consistently refused to address every time we have argued about this, choosing instead to probe around the figurative edges.

 

[abenomics12345]

You do not speak to me from a position of relative expertise. Do not passive aggressively quote definitions at me. I know what an earnings ratio is. I was using valuation to refer to the simple price per share. It is commonly used in this context.

I am extremely specific when I use terms in this context - if you understand then I expect you to use them as such.

And I said that rescuing stocks in this moment would impede the markets ability to deliver a stable rate of return in the future due to the relevant property issues, a point you have consistently refused to address every time we have argued about this, choosing instead to probe around the figurative edges.

Be specific, define 'rescuing stocks' - if you mean "issue 10 trillion RMB of special bonds to invest in the stock market" then I agree that would be retarded. But if the point here is to put a floor under the market so reflexivity doesn't take over, then no, that is perfectly sensible as a rescue.

 

[hereforsemithread]

Be specific, define 'rescuing stocks' - if you mean "issue 10 trillion RMB of special bonds to invest in the stock market" then I agree that would be retarded. But if the point here is to put a floor under the market so reflexivity doesn't take over, then no, that is perfectly sensible as a rescue.

And how much money do you think it would take to put a floor on the Chinese stock market for multiple years in the face of these negative wealth effects? It may not be much less than what you quoted, even if more spread out. In fact, given the lengths of time involved, it could be more.

 

[abenomics12345]

And how much money do you think it would take to put a floor on the Chinese stock market for multiple years in the face of these negative wealth effects? It may not be much less than what you quoted, even if more spread out. In fact, given the lengths of time involved, it could be more.

It matters less so how much money you actually use and more that you intend to keep the market from imploding (which by the way, Central Huijin buying is signalling more so than it is actually buying in droves) - Mario Draghi promised "whatever it takes" - he did not use "whatever it takes".

Also, the irony here is that if the market actually performed better it would be the perfect wealth effect to offset the negative wealth effect of the real estate drag, especially accelerate the transition away from speculating in more houses and instead turn the Chinese capital markets into a true savings vehicle as opposed to a speculative casino; consumption would also in-turn improve - there are multiplier effects in the positive, as there is in the negative.

I recognize this all takes time, but unfortunately, the longer you drag this out, the bigger the rescue package needs to be.

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.

Also, case in point here - while sustainable housing sales should be at 1bln sqm/year we are currently run-rating significantly below that number - meaning that housing is a much bigger drag on the economy than even the regulators wanted. This is why they've basically taken away virtually all of the housing purchase restrictions in almost all the cities in recent months. Unfortunately, there's been extremely limited response from buyers - even those who need housing (starting family etc) are not buying and waiting. I trust you understand how it is not conducive to economic growth when more people are sitting on cash and not making necessary purchases they otherwise would've made.

There is no doubt the real estate market needed to be corrected; there is no doubt there are a lot of ShitCo LGFVs that needs to be bailed out/digested by the banking system - cutting rates not an option anymore because of NIM pressure on the banks; and so with deflation, R>G - there is no avoiding this cost:

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