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China: Deterioration | Financial Times

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good morning. We were pessimistic about China. But it’s not pessimistic, as shown below. We will take off tomorrow as Rob flies to London and Ethan is working on an unhedged project. I’m back on Thursday. Send us an email: robert.armstrong@ft.com When ethan.wu@ft.com..

China’s growth: worse

The last time We wrote about China, but at the end of last month the topic was China’s “impossible trilemma.” It is impossible to solve 5.5% economic growth, stable debt-to-GDP ratio, and zero Covid-19 at the same time. Given this, Beijing’s least politically resistant short-term path is supporting growth by injecting debt into unproductive real estate / infrastructure projects.recently noise Xi Jinping reveals that the country plans to take the easy path again.

However, it turned out to be too generous to describe the situation as a trilemma. China’s terrifying economic data in April suggests that the Zero-COVID policy may be inconsistent with anything other than modest growth, even with government attempts to stimulate it.

This is april Looks like China:

  • Retail sales were down 11% year-on-year, compared to the expected decline of less than 7%.

  • Industrial production fell 2.9%.

  • Manufacturing was particularly weak, with car production declining 41%.

  • Export growth was 4%. Squeak A slowdown from 15% growth in March.

  • Real estate activity has collapsed and construction has begun to fall 44 (!) Percent

Behind all this is credit growth, which stubbornly refuses to accelerate, despite policy tweaks (such as last month’s reduction in bank reserve requirements) and painstaking authorities. This is the JP Morgan Chart for Total Social Finance (TSF), a broad indicator of government credit creation through April.

JPMorgan’s Haibin Zhu divides the landscape pattern into three parts.

(1) Reducing household loans as industry data suggests a further slowdown in real estate sales. (2) Significant slowdown in medium- to long-term lending to the corporate sector, reflecting sluggish credit demand for corporate sector financing and investment. (3) Relaxation of government bond issuance.

Number 1 speaks for itself. China’s real estate industry is undergoing extensive restructuring. Homebuyers will be cautiously trampled.

The second keyword is “demand”. Why do businesses want to risk big new investments, even if bank lending is available, even though the Zero-COVID policy has 300 million city dwellers estimated to be under some form of blockade? Do you think? How can I know that it’s a demand issue? Zhu states: [broad money] Growth. .. .. And slowing loan growth. .. .. Therefore, the ratio of new loans to new deposits fell to 86.2%. This is the lowest ratio in 5 years.

And we look at the issuance of government bonds. This is what the government can count on when it wants to generate some growth.But as my colleagues Sun Yu and Tom Mitchell pointed out in their prominence, there is also a nasty problem. feature last week. Municipal funding, which is an important source of funding for infrastructure projects, faces restricted access to bank credit.

Bond issuance by LGFVs was only RMB785 billion ($ 112 billion) in the first four months of this year, down almost 25% from the same period in 2021. Today, many Chinese banks prefer to lend to infrastructure projects led by large state-owned enterprises. Than LGFVs, which they consider to be too risky.

The government will probably keep trying to get things started in a hurry. For example, on weekends, mortgage rates for first-time buyers were reduced. But a few months ago, brokers and experts had hopes for Philip from government action, but now there is growing pessimism about how much profit can be gained during the blockade. ing. “There is a fundamental tension between maintaining the current Covid prevention strategy and boosting growth,” said Gavekal Dragonomics.

This quote from FT nicely underestimates this point.

Zhiwei Zhang, Chief Economist at Pinpoint Asset Management, said the government is under pressure to launch new stimulus measures and that mortgage rate cuts are “a step in that direction.” But he added, “the effectiveness of these policies depends on how the government” fine-tunes “the zero-tolerance policy against the Omicron crisis.”

Tweak! People don’t buy new homes when they’re trapped in old homes, and businesses don’t rent them when the supply chain is closed. Will the government forgive the Zero-COVID policy? No one seems to think so. This is a stunningly depressing sign-off quote from the work of Yu and Mitchell:

Few expect Xi to ease the Zero-COVID campaign before it secures an unprecedented third-term government at a party convention later this year. Henry Gao, a Chinese expert at Singapore University of Business, said the strategy “has become a political crusade. It has become a political tool for testing the loyalty of officials.” “This is far more important to Xi than the digits of GDP growth.”

Both the equity and credit markets in China capture this harsh reality.

Still, in any case, sooner or later the blockade will end. And there are some signs that the current wave of infection may have subsided.Bloomberg report On Sunday, the total number of cases in Shanghai was declining and no new cases were reported outside the city’s quarantine area in two days. This is approaching a critical threshold due to the relaxation of the blockade protocol.

This kind of thing is enough to bring out optimists. JP Morgan’s China Equity Strategy Team has released a list of “profitable” stocks. [from] Shanghai reopening theme “. They include transportation, semiconductors, auto parts, and building materials companies. Looking at the price chart above, it is clear that anyone who properly makes a reopening transaction can make some money with this kind of name. We hope they work, but we don’t know how to measure it ourselves.

What kind of growth rate the Chinese economy will return to is another matter. Julian Evans-Pritchard of Capital Economics argued that the key variables were global demand and the government’s desire to stimulate after the blockade was lifted. He foresaw a recovery that would begin soon, but he wrote it:

This recovery may be slower than the recovery from the first outbreak in 2020. At that time, Chinese exporters were benefiting from the surge in demand for electronics and consumer goods. In contrast, the pandemic-induced changes in spending patterns are now reversing, putting pressure on China’s export demand. Meanwhile, authorities are now taking a more restrained approach to policy support. .. .. As a result, we hope the worst is over, but we believe the Chinese economy will have a hard time returning to pre-pandemic trends.

I agree with Evans Pritchard for global demand, but not for government restraint. Our guess-and admit that it is the only word-is that the uselessness of the stimulus under the blockade only increases the financial and financial large-scale political demands after the blockade is over. It means that there is.

One good reading

A depressing example of how capitalism works: e-pimps Only Fans.

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China: Deterioration | Financial Times

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