Chinese Economics Thread

[gelgoog]

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 stock market is pretty important. Chinese semiconductor companies for example are using the stock market to raise capital for their fab expansions. Which is why the US is currently trying to crash down the Chinese stock market. Just like they did in the Asian Financial Crisis which was started when George Soros started attacking the Hong Kong Dollar.

Anyway, the Chinese government will just hoover these stocks at dimes on the dollar. The market will be further strengthened to prevent these kinds of speculative attacks in the future. Thanks a lot for your money Western speculators.

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.

This comment shows how little you know about the Chinese market. Even I know that the Chinese bank deposit rates aren't 2%.
As for the low interest rate loans to infrastructure construction projects I am fairly sure the difference is covered by the Chinese government. These projects have a significant impact on worker mobility so they are pretty important economically.

 

[abenomics12345]

Even I know that the Chinese bank deposit rates aren't 2%.

Literally, go check your f'ing banking app.

You are really giving Gordon Chang a run for his money...

 

[hereforsemithread]

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 put money into the markets; consumption would also in-turn improve - there are multiplier effects in the positive, as there is in the negative.

1. The wealth effect would not be that significant because stocks are only a tiny fraction of household wealth in China.
2. My entire point is that a big rescue package right now would be COUNTER to the long term goal of shifting more household wealth into stocks because such a rescue would almost certainly delay the process of re-setting the real estate industry at a lower level of activity and appreciation.

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

This may sound comforting but there is no reason to believe it is necessarily true or that beijing sees it that way. In a few years when the real estate and LGFV situation has been basically resolved and the bad debt has been written off or settled into a long term repayment plan, then it can begin to open the credit taps again, and be confident that it will not create another real estate bubble because an RE tax will have made speculation for profit an unviable strategy in most cases, and developers will be fewer and far more strictly regulated. More companies will have profits in excess of their investment needs and that rise in free cash flow will boost their share prices. Meanwhile the families that own those businesses will take some of those excess profits for themselves, and with real estate having been rendered undesirable for speculation, some of that money will go to stocks. Sentiment will gradually recover over time. And yes, it may well take some booster efforts by state funds to get things going, but there is no reason to believe those boosts will necessarily be more expensive than sustaining the market constantly for years while real estate fully deflates, and that is, AGAIN, not even mentioning how such an action would probably prevent RE from deflating as needed to begin with.

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.

This is exactly what people in lower tier cities do when trying to afford housing that has been vastly overpriced relative to their development level.

 

[gelgoog]

2.55% isn't 2%. And there are banks with higher rate than that.

Even in the US 90% of people just don't invest in the stock market. Instead their pension funds will invest in it. But this wasn't always the case in the US. Pension funds didn't use to be allowed to invest in high risk things like the stock market until like the 1980s I think.

Can't people buy precious metals in China or something? If you are worried about just staving off inflation in your savings just buy some gold bars. With the current market deflation in China I don't know why you expect to earn huge amounts of interest on deposits or investments for that matter.

 

[abenomics12345]

@hereforsemithread I don't think you and I disagree on the conceptual level of what needs to happen. The main difference between what you are saying and what I'm saying is where we are along that pathway of reform.

long term goal of shifting more household wealth into stocks

The long term is made up of many short terms, and you cannot have people give up hope in the market for and then expect them to turn 180 and dive in deep. Look no further than the Weibo comments section of the US Embassy/Indian Embassy.

Sentiment will gradually recover over time. And yes, it may well take some booster efforts by state funds to get things going, but there is no reason to believe those boosts will necessarily be more expensive than sustaining the market constantly for years while real estate fully deflates, and that is, AGAIN, not even mentioning how such an action would probably prevent RE from deflating as needed to begin with.

I would push back here in saying that the RE deflation is already at a point where the government is worried. That is why they are relaxing all the purchase restrictions.

Instead of crushing real estate further, it is much easier to have incomes grow into the real estate prices. (If you look at cities like Xi'an/Changsha, they're already only at 5x household incomes in some areas - that is not expensive at all; Tier-1 cities, especially Shanghai, will never be cheap because those are international cities, as sad as it may sound, not everyone who wants to live in Shanghai will be able to afford a place in Shanghai. This is not inconsistent with the concept of an olive-shaped income/wealth pyramid, which they've said they want. )

This is exactly what people in lower tier cities do when trying to afford housing that has been vastly overpriced relative to their development level.

Disposable income growth in the past 3 years has been 9.1% (2021), 5.0% (2022), and 6.3% (2023), that is 21% growth over 3 years. Meaning, any home, even if prices did not drop, just got 21% cheaper vs. income.

Meanwhile, housing prices have been flat even according to official data, which, if anyone follows the industry, is extremely generous (just check Beike).



Real transaction prices have fallen anywhere from 10-20% to 30-50% depending on where you are - and this isn't a bad thing - this is extremely good!

So a home that used to sell for 1mln RMB, at 10x Price/Income, is now 800k (assume 20% price decline); If the family used to make 100k RMB, now they make 120k. Price/Income ratio went from 10x to 6.67x.

So why are sales still down 40% in January 2024?

Let me flip the question to you - what is the price/income ratio that you think is the floor?

2.55% isn't 2%. And there are banks with higher rate than that.

How convenient of you to ignore the rates that are below 2%? Take an L dude.

 

[hereforsemithread]

The long term is made up of many short terms, and you cannot have people give up hope in the market for and then expect them to turn 180 and dive in deep. Look no further than the Weibo comments section of the US Embassy/Indian Embassy.

You of all people should know how temperamental shorter-term traders are, we should not take their anger seriously. They would forget all about it in 2 weeks if the market recovered. As to households, it would obviously take longer, but I never said sentiment would 180, only that it would gradually recover, probably over several years

would push back here in saying that the RE deflation is already at a point where the government is worried. That is why they are relaxing all the purchase restrictions.

Maybe they are worried about it, but the reason prices noze dived to begin with was because credit restrictions on developers lead to land purchases drying up which meant that prices weren't constantly being bid up. Maybe depreciation is making the cg uncomfortable, but until it gets to the point where it directs banks to fund developers' land acquisitions, then it is clear they view continued depreciation as preferable to hitting halt on reforms.

Instead of crushing real estate further, it is much easier to have incomes grow into the real estate prices.

The fact that developers received a lion's share of the commercial credit being offered meant that it was not possible for incomes to grow into prices. Credit needed to be redirected into industries which actually have a role to play in increasing labor productivity and thereby the real wage. A fall in land sales and subsequent depreciation of housing was an unavoidable result of this. They are trying to make incomes grow, the two just cannot be decoupled.

 

[supercat]

The US regime is fighting an economic war against China. The good thing is that China doesn't need that much FDI compared to the earlier years.

https://twitter.com/i/web/status/1755082409178186153

David P Goldman: no financial crisis in China, as the rally in bank stocks indicates.

https://twitter.com/i/web/status/1755213717082448114

One of the most important big-ticket items is doing pretty well, even taking into consideration of the timing of the Chinese New Year in 2023.

https://twitter.com/i/web/status/1755158515377659986

China will set a growth rate of 5.0% for 2024.

Please, Log in or Register to view URLs content!

 

[abenomics12345]

You of all people should know how temperamental shorter-term traders are, we should not take their anger seriously. They would forget all about it in 2 weeks if the market recovered. As to households, it would obviously take longer, but I never said sentiment would 180, only that it would gradually recover, probably over several years

I don't think we disagree much here. But a flat to -5% equity market is a lot easier to digest than the -60% people are sitting on. Unfortunately the consumer economy is largely driven by the rich - so you can't expect them to consume while they've felt the brunt of the reform hammer. So you can understand why the best business in Shanghai today is an immigration consultant.

until it gets to the point where it directs banks to fund developers' land acquisitions, then it is clear they view continued depreciation as preferable to hitting halt on reforms.

Please, Log in or Register to view URLs content!

We are already here.

The fact that developers received a lion's share of the commercial credit being offered meant that it was not possible for incomes to grow into prices.

Developers have not received the lion share of loans for the better part of the past few years. So this transition has already happened. You would know that Trusts/WMPs have been shut down as part of the shadow banking cleanup since 2017.

 

[hereforsemithread]

So why are sales still down 40% in January 2024?

Let me flip the question to you - what is the price/income ratio that you think is the floor?

I didn't say the anticipation of depreciation wasn't depressing sales, and if I implied as much then I didn't mean to. It has hit sales badly. I don't personally have a definite ratio that I think would be ideal, just significantly lower than it was. However low it needs to be for the RE downsizing, bad asset disposal, and fiscal reforms to be carried to completion.

We are already here.

Those projects are overwhelmingly existing unfinished projects rather than wholly new developments. Directing credit to them will not have much influence on land prices or local government revenue.

Developers have not received the lion share of loans for the better part of the past few years. So this transition has already happened.

You're correct, and now the cgs job wrt bank loans is to make sure it stays that way indefinitely.

so you can't expect them to consume while they've felt the brunt of the reform hammer

You're right, you can't. But that's not a reason to stop. They will start to consume more when their assets start appreciating again. If a few thousand flee, not much is lost. It's not like their capital is going anywhere. Meanwhile everyone else, still a majority of consumption mind you, will be enjoying the real wage gains wrought by the reform. This may be of interest

 

[abenomics12345]

You're correct, and now the cgs job wrt bank loans is to make sure it stays that way.

I don't think it will take much effort on the government's part to keep it that way. I can't recall the number on top of my head but developer loans weren't ever a big part of total banking system assets to begin.

Those projects are overwhelmingly existing unfinished projects rather than wholly new developments. Directing credit to them will not have much influence on land prices or local government revenue.

Can't buy more land unless they finish off existing projects. Also, RE tax has to be done when the economy is accelerating (PMI > 50), not when it's on its knees. So whatever fiscal reform at local government level, it has to come *after* we are out of this current environment.

However low it needs to be for the RE downsizing, bad asset disposal, and fiscal reforms to be carried to completion.

Sure, but you can't escape a "big % of GDP"-type of fiscal pacakge to get the bad assets out of the system. The question is how/where to spend it, but monetary policy is no longer effective (just look at the M1/M2 gap).

Meanwhile everyone else, still a majority of consumption mind you, will be enjoying the real wage gains wrought by the reform.

See this is the problem with deflation - the debt in the system is *nominal* - so real wages might increase and real GDP grows, nominal GDP is slower, and might be slower than the interest rate on the LGFV debt - R>G = meaning that you can't grow your way out of the leverage today.