Chinese Economics Thread

[Blitzo]

The financial markets is simply reacting to the Chinese economic numbers as they are released confirming that the economy continues to slow. It also suggest that the various measures taken by the Chinese central government in recent times are not having the desired effect to jump start the economy. Discounting the connection of the Chinese economy to the Chinese stock market and the correlation is missing the point. It is true that not all stock market downturn precedes an economic slowdown or recession. However the historical empirical evidence are there to support the view that all major economic downturn are preceded by similar stock market movements by between 12 to 18 months.


The reasons for such a correlation is actually easy to understand and intuitively self evident. In a rising stock market, companies enjoy a healthy economy with consumer spending driving company profits due to demand. The increasing profits are reflected in enhanced market valuation as evident by increasing PE's. This obviously in turn drive stock prices upwards. When the economy turns, the reversal of fortune starts to take a similar effect on company profits which is reflected in depressed earnings and hence valuation and consequently on stock prices. The major point to note is that in a western type market where market information is efficient, smart money starts to rebalance their portfolio ahead of the general crowd and hence there is always a lag between the economy and the stock market with the latter leading the way by at least 12 months. In the Chinese stock market, institutions are not as heavily weighted and so the correlated pull and effect might be different but the principles remain unchanged. The higher volatility of the Chinese stock market in my view is attributed to basically three things. Firstly it is just one big Chinese casino and investment decisions tend to be generally speculative based on rumours and greed. Secondly, market information is not as efficient and so reactions of market participants tend to over-react when dealing with rumours because of the lag in official information. Lastly, the Chinese central government had been inserting itself in various market interventions and in some cases throwing curve balls.

I don't think anyone would claim that the Chinese stock market's movement is completely unrelated to the real economy, but that relationship must be considered in light of point two which plawolf described, and also the three reasons you described in your own post.

That is to say, it is likely that the Chinese stock market does to a degree reflect the state of China's "economic numbers," but we need to consider if not fully appreciate that the accuracy of that reflection or the specificity of that reflection is likely much more distorted compared to in more developed western markets and economies... because of the various reasons listed such as China's less well developed stock market and less experienced govt regulation, but I think the biggest reason is because of the sheer mass of small, inexperienced and relatively uneducated retail investors who don't have the resources and knowledge of developed institutions.

 

[antiterror13]

The cynical part of me suspect baser, financial motivations also.

One ............. 1% of Americans owns more wealth than the remaining 99% combined.

.......................

If you own the media and the politicians, it's easy to get the people to believe and do what you want yet still think it was all their own idea.

small correction ... not Americans ... but the world .
1% richest own more than the rest 99%

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[Brumby]

I don't think anyone would claim that the Chinese stock market's movement is completely unrelated to the real economy, but that relationship must be considered in light of point two which plawolf described, and also the three reasons you described in your own post.

That is to say, it is likely that the Chinese stock market does to a degree reflect the state of China's "economic numbers," but we need to consider if not fully appreciate that the accuracy of that reflection or the specificity of that reflection is likely much more distorted compared to in more developed western markets and economies... because of the various reasons listed such as China's less well developed stock market and less experienced govt regulation, but I think the biggest reason is because of the sheer mass of small, inexperienced and relatively uneducated retail investors who don't have the resources and knowledge of developed institutions.

No issue here but what is not disputed (at least to me) is the direction in which the Chinese market is heading and it will be for some time. In my view, it is not some temporary aberration but there are some fundamental structural issues that would not be fixed anytime soon.

 

[Blitzo]

No issue here but what is not disputed (at least to me) is the direction in which the Chinese market is heading and it will be for some time. In my view, it is not some temporary aberration but there are some fundamental structural issues that would not be fixed anytime soon.

If you are talking about the stock market direction, I think volatile should be the word to describe it, but it has also been overvalued quite a bit relative to its recent peak in June last year, so it definitely is not going to reach those heights again in a while (which is a good thing), and in terms of overall direction it will definitely be lower in a relative sense compared to June 2015. It will also take a long time until the fundamental issues underpinning the market are changed to a manner where the volatility is replaced with greater stability.

If you are talking about the overall economy, well that's another matter. The economy isn't ever going to reach growth rates of double digits (which is also probably a good thing), and I suppose in that sense it is going to continue having growth rates lower than what was seen in the 90s, and that its overall average growth rates are definitely going to be lower as well.

 

[Brumby]

If you are talking about the stock market direction, I think volatile should be the word to describe it, but it has also been overvalued quite a bit relative to its recent peak in June last year, so it definitely is not going to reach those heights again in a while (which is a good thing), and in terms of overall direction it will definitely be lower in a relative sense compared to June 2015. It will also take a long time until the fundamental issues underpinning the market are changed to a manner where the volatility is replaced with greater stability.

If you are talking about the overall economy, well that's another matter. The economy isn't ever going to reach growth rates of double digits (which is also probably a good thing), and I suppose in that sense it is going to continue having growth rates lower than what was seen in the 90s, and that its overall average growth rates are definitely going to be lower as well.

I am referring to your latter point concerning the economy. It is not simply about whether it will be double digit growth again but the nature of the economic growth model going forward if I can even describe it as a growth model. The underlying factors underpinning the past double digit growth is a one time event driven by an investment growth model funded by borrowings. Such a model is unsustainable because debt is now 3 and 1/2 times the size of the economy and the diminishing productive nature of ongoing structural investments to drive growth through borrowings. This is the primary reason for attempting to migrate to a higher value add economy driven by consumer demand. Unfortunately there are many fiscal issues arising until the rebalancing takes effect. This has to do with; (i) the role and sharing of expenditure between state and central government; (ii) the revenue base composition heavily weighted towards indirect taxes; (iii) the likely growth margin disparity between revenue and expenditure of government; and (iv) an aging population support ratio exacerbated by the one child policy.

I understand, China's economy needs to grow at 8 % to maintain equilibrium with unemployment but in reality the actual number in 2015 and expected in 2016 would probably be disappointing. The market understands the issues and is reflected eventually in the stock market performance.

 

[Blitzo]

I am referring to your latter point concerning the economy. It is not simply about whether it will be double digit growth again but the nature of the economic growth model going forward if I can even describe it as a growth model. The underlying factors underpinning the past double digit growth is a one time event driven by an investment growth model funded by borrowings. Such a model is unsustainable because debt is now 3 and 1/2 times the size of the economy and the diminishing productive nature of ongoing structural investments to drive growth through borrowings. This is the primary reason for attempting to migrate to a higher value add economy driven by consumer demand. Unfortunately there are many fiscal issues arising until the rebalancing takes effect. This has to do with; (i) the role and sharing of expenditure between state and central government; (ii) the revenue base composition heavily weighted towards indirect taxes; (iii) the likely growth margin disparity between revenue and expenditure of government; and (iv) an aging population support ratio exacerbated by the one child policy.

I think the previous model of growth has well and truly been philosophically abandoned a few years ago, and the economy is currently in the middle or early-middle stages of reform.
That reform process is of course a big reason for the reduction in growth rate compared to previous years, and was a conscious decision. And the reforms are still up in the air, and it will be a little while yet until we see where the reforms truly land and what that means for the subsequent post reform growth rate and the sustainability of post reform growth.

If you had said what you were saying three years ago and if the govt had not begun planning any sort of reforms then I'd probably be much more worried.

I understand, China's economy needs to grow at 8 % to maintain equilibrium with unemployment but in reality the actual number in 2015 and expected in 2016 would probably be disappointing.

8%? That is the first time I've heard of it, especially in relation to any sort of equilibrium with unemployment. I remember 8% being mentioned years ago back in the early days of the great recession as a growth target for a couple of years, but that is almost ancient history.
The govt has consistently said for 2015 they expected a growth rate of around 7%, and going forwards to 2020 they're expecting/aiming for an average growth rate of 6.5%.

The market understands the issues and is reflected eventually in the stock market performance.

I think the way I would say it, is that the market understands that there are certain issues in the economy and also that things are not growing as fast as it was, but whatever perceivable evidence (for whatever issues there may be), is then in turn strongly magnified and distorted by the inexperience, lack of education, and the motivations of retail investors that make up the bulk of the Chinese stock market, which causes the relatively high degrees of market turmoil we are seeing.

In other words, what I'm saying is anyone trying to "reverse engineer" the possible state of the actual Chinese economy based on the state of the stock market, will need to consider all the significant distortions and magnifications and motivations of the players in the Chinese stock market and how that may differ to the stock market-economy relationship in more developed economies.
IMO, in the context of the present Chinese stock market-economy relationship, I think any attempts to use the stock market to reverse engineer the state of the Chinese economy is probably unhelpful, and adding the stock market as a factor to explain the Chinese economy would probably increase the degree of variance and uncertainty rather than reduce it.

EDIT: another way of looking at it, is that the actual economy definitely did not grow massive percentages in early 2008 or mid 2015 when the stock climbed to ridiculous heights, and if the Chinese stock market did reflect the actual state of the economy then one would've expected the actual economy to have grown that much as well. But obviously the stock back then was overvalued and susceptible to many flaws aforementioned regarding the nature of the retail investors in the Chinese stock market, and those same flaws which apply when the stock market experienced overvalued growth do not go away when the market grows lower and/or becomes more volatile.

 

[Brumby]

I think the previous model of growth has well and truly been philosophically abandoned a few years ago, and the economy is currently in the middle or early-middle stages of reform.
That reform process is of course a big reason for the reduction in growth rate compared to previous years, and was a conscious decision. And the reforms are still up in the air, and it will be a little while yet until we see where the reforms truly land and what that means for the subsequent post reform growth rate and the sustainability of post reform growth.

If you had said what you were saying three years ago and if the govt had not begun planning any sort of reforms then I'd probably be much more worried.

There is no suggestion from me that the Chinese government does not recognise the problems or it is not taking measures to steer the economy. There are two major issues though. First is China has a political economy in that it is heavily weighted towards SOE's. Such entities are not easy to reform. There are other issues in the way of a more open economy which I would not get into. The second more pressing issue is that while the economy is being rebalanced and a question mark remains on how quickly it can get there, there are significant emerging fiscal issues.

8%? That is the first time I've heard of it, especially in relation to any sort of equilibrium with unemployment. I remember 8% being mentioned years ago back in the early days of the great recession as a growth target for a couple of years, but that is almost ancient history.
The govt has consistently said for 2015 they expected a growth rate of around 7%, and going forwards to 2020 they're expecting/aiming for an average growth rate of 6.5%.

I read that 8 % growth rate was the equilibrium point to maintain unemployment rate and the main reason why the Chinese government was keen to ensure this minimum level. Rising unemployment would undermine the legitimacy of the government.

I think the way I would say it, is that the market understands that there are certain issues in the economy and also that things are not growing as fast as it was, but whatever perceivable evidence (for whatever issues there may be), is then in turn strongly magnified and distorted by the inexperience, lack of education, and the motivations of retail investors that make up the bulk of the Chinese stock market, which causes the relatively high degrees of market turmoil we are seeing.

In other words, what I'm saying is anyone trying to "reverse engineer" the possible state of the actual Chinese economy based on the state of the stock market, will need to consider all the significant distortions and magnifications and motivations of the players in the Chinese stock market and how that may differ to the stock market-economy relationship in more developed economies.
IMO, in the context of the present Chinese stock market-economy relationship, I think any attempts to use the stock market to reverse engineer the state of the Chinese economy is probably unhelpful, and adding the stock market as a factor to explain the Chinese economy would probably increase the degree of variance and uncertainty rather than reduce it.

EDIT: another way of looking at it, is that the actual economy definitely did not grow massive percentages in early 2008 or mid 2015 when the stock climbed to ridiculous heights, and if the Chinese stock market did reflect the actual state of the economy then one would've expected the actual economy to have grown that much as well. But obviously the stock back then was overvalued and susceptible to many flaws aforementioned regarding the nature of the retail investors in the Chinese stock market, and those same flaws which apply when the stock market experienced overvalued growth do not go away when the market grows lower and/or becomes more volatile.

As I said the stock market tends to lead the economy at major turns but concurrently you can't just use the stock market turns as an explanation for the economy. Major turns can only be established after the fact and not as a predictor.

 

[Blitzo]

There is no suggestion from me that the Chinese government does not recognise the problems or it is not taking measures to steer the economy. There are two major issues though. First is China has a political economy in that it is heavily weighted towards SOE's. Such entities are not easy to reform. There are other issues in the way of a more open economy which I would not get into. The second more pressing issue is that while the economy is being rebalanced and a question mark remains on how quickly it can get there, there are significant emerging fiscal issues.

I see.
Well, I think if one went to draw out the fibres of the current state of the Chinese economy and the circumstances for reform, one could find certain negative characteristics and also some positive characteristics that could have implications for reform.

The question will be how well those various characteristics pan out in terms of actual reform and whether it can lead to a healthy growth rate which is sustainable, and at this stage I don't think we have enough information to try and project how successful they could be, and trying to quantify all the positives and negatives and then to fit them together to take a peek into the crystal ball is difficult to do in any universally acceptable and scientific way.

I read that 8 % growth rate was the equilibrium point to maintain unemployment rate and the main reason why the Chinese government was keen to ensure this minimum level. Rising unemployment would undermine the legitimacy of the government.

I do recall reading that as well, but I think that assignment was done mostly by mainstream/western/english speaking media -- what I do remember is that 8% was the govt's growth target initially in the early years after the recession.. However, I do not remember the Chinese govt saying anything about 8% growth being able to magically attain a certain unemployment rate..

Either way, 8% is definitely not a growth target for the foreseeable future and has not been one for the last few years, given the govt's own announced and predicted growth targets have been quite obviously under 8%... so not achieving 8% growth is not much of a "disappointment" because it was never a goal to begin with.

[Not to mention the complete illogical nature of suggesting that achieving a certain growth rate would magically push unemployment below a magical line that would categorically define the legitimacy of a govt (not directed at you, but rather at the original media outlets which implied it).
There's also the issue that as an economy grows, the nature of the economy's output and value also changes and that no economy can maintain any high level of growth continuously -- so the idea of any hypothetical govt of a country needing to attain 8% growth rate "forever" to maintain "stable" unemployment is bewildering to say the least. In fact, I smelt a massive rat back in 2009 when I first read the 8% number as somehow being required to be achieved for "legitimacy" or whatever, simply because thinking about it an extra couple of steps made the theory become completely untenable.
But I digress.]

As I said the stock market tends to lead the economy at major turns but concurrently you can't just use the stock market turns as an explanation for the economy. Major turns can only be established after the fact and not as a predictor.

I don't think this disagrees with what I've said regarding the substantial degree of caution that needs to be applied when trying to establish links between the Chinese stock market and the real Chinese economy. In fact I've been describing the examples in retrospective terms anyway.

 

[Qi_1528]

Brumby, I think you're still overestimating the effect of the stock market on the real economy. Despite the stock market volatility over a period of 25 years, the overall economy has consistently maintained strong growth. Even if we assume real growth today is 4% rather than the 6.9% reported, that's still a good number in the current global environment. None of the down turns in the stock market impacted the real economy hard enough to dampen growth seriously. I'll admit, it can be argued that's at least partly due to government policy, such as the stimulus, but the main point still stands.

What you're talking about does generally apply to Western economies. The Chinese economy is a different animal though.

 

[Brumby]

China suspends mechanism aimed at ending stock market turmoil

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Chinese authorities sought to bring an end to new year stock market turmoil with a dramatic U-turn on a new mechanism that Beijing had hoped would prevent sharp selloffs.

Overnight, in a tacit admission that the new circuit breakers introduced only this week were having the opposite effect to that intended, China’s main stock exchanges said they were suspending the mechanism. The move came after the breaker was tripped for the second time in a week as the market fell 7% within half an hour of opening.

Anybody has any idea what does it mean to suspend the circuit breaker? Does it mean that the authorities will allow a freefall of the stock market without intervening?

Chinese stock markets have been hit this week by a mix of weaker economic data and the prospect of a ban on share sales by major stakeholders being lifted. The market turmoil and the yuan’s depreciation have fanned fears that China’s slowdown will be more pronounced than policymakers have warned. The country’s central bank has said it expects growth in 2015 to be the slowest for a quarter of a century.

Anybody has any idea what was the slowest growth rate in the past 25 years?