Chinese Economics Thread

[Andy1974]

Semantics here are not going to matter - but what I specifically mean here, is that when restaurants are not making money, they will fire workers and close down.

These are the bottom rungs of society who are supposed to be on the receiving end of 'increasing disposable income'. How they increase their disposable income when they lose their jobs, is a question you should think about.

Yes, I understand.

But don’t you also have to take into account the falling costs of those restaurants? if their electricity bill is reduced, along with rent and most importantly food costs then they have more room for profit.

Basically, if costs reduce at a faster rate than wages, what’s they problem?

EDIT: Disposable income is not semantics, it’s crucial to the idea that falling prices due to increased productivity doesn’t reduce consumption. For example. If your income is frozen for a few years, or even drops slightly, while your mortgage interest rate is reduced, and you tax is reduced, then your disposable income will grow and then your consumption has plenty of room to grow. You will also be getting more from your disposable income because prices are reduced.

 

[abenomics12345]

Basically, if costs reduce at a faster rate than wages, what’s they problem?

This obviously isn't happening, otherwise profits would not drop 89% in Beijing.

As a counter example, Alibaba in 2024 grew earnings despite revenue growth stalling - that is an example of cost cutting. Guess how many people lost their jobs in Fiscal year 2023?

For example. If your income is frozen for a few years, or even drops slightly, while your mortgage interest rate is reduced, and you tax is reduced, then your disposable income will grow and then your consumption has plenty of room to grow.

Debt principal is nominal - in a deflationary environment, in 10 years, wages would have dropped 10-15% meaning you'd have to pay a bigger % of your income to pay down that debt. Also, if things are getting cheaper, everyone would defer consumption/investment in almost everything because the expectation is that things are going to be cheaper in the future. Who needs to buy stocks - they're going to get cheaper in the future.

Meaning, reduced economic activity all around.

Seriously, get it out of your mind that deflation is somehow good.

 

[Overbom]

deflation is not good. now deflation due to real estate bubble burst is good as long as real estate price decline is gradual

from my amateur eye, price decrease is too big and sudden which causes all sorts of troubles.

IMO the big question is how internal resources can be smartly reallocated to compensate for this, and how things will look in 2025. if real estate price declines in a similar pace next year then that's cause of concern

 

[proelite]

The problem is that it’s leading to a lot of capital out flow as richer Chinese are liquidating their assets and fleeing with the wealth over seas. The loop holes need to be closed there as that money should be redirected to state banks or key sector investments. You can’t force people not to sell in a correcting market but seeing all that value created from hard work evaporate and go to the West sucks.

China lost some billionaires but got back students, professors, and scientists. I call that a good deal.

If you have USD offshore in a bank account because you're an exporter, you can command a significant premium by running money laundering offshore for those who want to move cash offshore (of which there are many).

WTH is this.

 

[Xiongmao]

The problem is that it’s leading to a lot of capital out flow as richer Chinese are liquidating their assets and fleeing with the wealth over seas. The loop holes need to be closed there as that money should be redirected to state banks or key sector investments. You can’t force people not to sell in a correcting market but seeing all that value created from hard work evaporate and go to the West sucks.

From the stats I have read, in 2023 about 15,000 millionaires left China, that is 0.15% of the total million millionaires. That is an insignificant number, and for all we know, these are the tax evaders who are about to be caught. It doesn't matter how many billionaires leave, we need more millionaires, not billionaires anyway.

 

[doggydogdo]

This is the data from Beijing Bureau of the NBS:

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Restaurants in Beijing saw profits decline by 89% in 1H24 - they are basically not making money.

From Shanghai:

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Retail sales are -2.8% in first 7 months of the year (Jan-March was 0.1% growth) - you do the math on how April-July was (hint: its below -2.8%).

The data has been deteriorating, especially in the past 3 months.

This is the data from industry association for machine tools (supposedly a growing segment of the economy with yuuuuge potential):

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Volume up 6.6%, revenues down 3.6. Profits down 15%.

None of these looks too bad. For Beijing you could literally see that total profit grew 9.8%. For Shanghai the retail data is too vague to get anything useful. For machine tools are still growing, still profitable, but competition is driving down profits a lot.

These are more nitpicks than anything.

 

[bobsagget]

If your prices are all falling your dollar buys more. If property prices decrease a cities gdp can shrink even though actual productivity increases. Ex if 30 percent of a cities gdp is 4000 usd a month shit box over priced apartments and suddenly they drop on value to only represent 10 percent of the cities gdp while manufacturing increases by 10 percent it shows there is a flaw. I am so tired of us finance bros going muh gdp muh realestate etc while ignoring real non speculative parts of the economy. Freaking useless rent seekers. All western economist have been discredited for the fact they transformed the usa and uk from industrial power houses that were at different times the worlds largest trade partners to Potemkin villages ruled by rent seeking industries and a fictional service economy . Hedge funds cant win wars and cooked books are not prosperity

 

[abenomics12345]

None of these looks too bad. For Beijing you could literally see that total profit grew 9.8%. For Shanghai the retail data is too vague to get anything useful. For machine tools are still growing, still profitable, but competition is driving down profits a lot.

These are more nitpicks than anything.

Things are worsening (you see employment fell 2.7% in Beijing) - you might as well argue that the first knife cut of 凌迟 isn't too bad. Until there is something positive on the time horizon, things will continue to grind lower and worse off.

How is Shanghai retail data 'too vague'? Do elaborate more.

Also, if things "are not bad", why is there serious consideration for a 80-100bp cut to existing mortgage rates?

If your prices are all falling your dollar buys more. If property prices decrease a cities gdp can shrink even though actual productivity increases. Ex if 30 percent of a cities gdp is 4000 usd a month shit box over priced apartments and suddenly they drop on value to only represent 10 percent of the cities gdp while manufacturing increases by 10 percent it shows there is a flaw. I am so tired of us finance bros going muh gdp muh realestate etc while ignoring real non speculative parts of the economy. Freaking useless rent seekers. All western economist have been discredited for the fact they transformed the usa and uk from industrial power houses that were at different times the worlds largest trade partners to Potemkin villages ruled by rent seeking industries and a fictional service economy . Hedge funds cant win wars and cooked books are not prosperity

This sounds like you are shit out of luck living in NYC with that kind of rent - but do me a favor and leave your personal situation outside of a discussion about the Chinese economy. As I've stated *many* times, that the US has a shithole of an economy does not make China's problems go away. Move out of the US if you're so pissed off? Hell, if China is great move there? If you personally chose to live that life in NYC - stop bitching about it and grow the f up.

 

[Index]

The obsession with driving up housing rent as a manner to grow gdp is truly insane.

How exactly does it help anyone that a rent of 10000 yuan would be transformed to 30000? It's empty garbage financialization that in reality only stifles the whole country in the long term. Yes people are "purchasing more", they're paying more for a house that does the exact same function as said house would have if it's price wasn't inflated. Meanwhile they're not using the money they used on rent to buy products that actually increase productivity, because they're buying the landlord's "product" of inflated rent.

At the end of the line you have an uncompetitive society with inflated gdp and indebted middle class.

It's even stupider because China has no reason to chase a gdp inflation at this point of development. They already enjoy the no1 spot prestige and privilege to use when bargaining with other countries. Nobody internationally gives a shit if you're no1 by 20% or 30%. China is already getting the largest retail sales, investment, preferential resource deals and so on.

With all of China's enemies slowing to a crawl or reversing, it's the perfect time to reset the housing question.

 

[Wrought]

You need to delineate the specific markets. The real estate market in China operates very much on a two tier system - the cities where people want to move into naturally have higher priced housing. And shitholes naturally have low prices. Rather than trying to smash property prices, the real solution is to improve social services to have more desirable places to live. The exorbitant price of real estate is the result of other problems (local government corruption, nefarious developers, lack of land supply in Tier 1 cities etc). Smashing real estate without other solutions is how you get back to square one.

It's true that deeper structural reforms are necessary, but that's what the third plenum was for. And as you already pointed out (correctly), it's a long-term fix not a short-term one. It's neither realistic nor desirable to keep inflating the property bubble for however many years implementing reforms will take. Smashing real estate is not mutually exclusive with structural reforms, and both are indeed happening right now.

Define 'distorted'. Apartments in Changsha/Xi'an/Chengdu are already at something like 10k/sqm - meaning a dual income family who makes 15-20k/month (7.5k-10k each) would have a price/income ratio of something like 4-6x - which is quite reasonable.

As for luxury apartments in Shanghai, they will never come down to that price range - nor should they. Shanghai is a world class city and its housing prices will be defined by the global supply/demand - to the extent that China wants to open up its markets to foreigners. The solution to Shanghai's housing price is to add supply of affordable housing - which goes back to my earlier point re: lack of land supply. These are structural problems that require reforms - blowing up housing prices for middle class mortgagees doesn't solve this. Much ink has also been spilt on the Singapore model.

Distorted is when 25% of your GDP comes from real estate. Quality of growth has been a big emphasis from leadership in recent years, and you can't achieve it with that ridiculous property share. Especially not if you continue pouring more good money after bad.

At the end of the day, the pain we are seeing now is simply unavoidable. Every single economy goes through this sort of thing at one time or another. The only question is how well it can be managed, and the judgement of that is only ever clear in hindsight.