Real question is how long China can hold out with basically skeleton level activity. We are now at 5 weeks since any real activity and there is no sign of return to normal on the horizon. The question then becomes when will things return to normal and what is the fall out? 1/n
Assume today the government announces everything is fine and you should go back to work, under normal circumstances you are looking at a 10-14 day return to normal levels. Given the health implications, strongly suspect you are looking at longer ramp up period. 2/n
For our purposes, let's assume if that happened today, it would be April 1 before activity in China returned to normal. That would mean a) roughly 70% of Q1 was basically no activity b) an additional 4 weeks or so before shipping and supply chains returned to normal 3/n
That means, the global economy and businesses around the world are looking at probably June (counting shipping time) before things get back to normal. Still stunned how few have any real back up plans but moving on. This raises another question about financing businesses 4/n
Great Leader Xi is clearly pushing to restart not because infection rates have gone down or the disease is manageable but because they are scared of the economic fall out. Honestly, they are right to be scared of the fall out. Let's hit the highlights quickly. 5/n
Chinese business and households are stressed beyond most anything in the world. The wide comparison made is to European or Japanese firms and households but this is a bad comparison for a simple reason I'll get to. Chinese firms and households now more indebted than almost 6/n
all comparisons you will see (except Japan). More indebted than US households etc etc as a % of GDP or household income. Here is why the stress is greater: Chinese firms and households pay significantly higher interest rates. If we compare their debt loads to middle income 7/n
countries, nothing else even comes close. China is an extreme outlier. By comparison: Japan spends a couple percent of GDP servicing debt, China spends 15-20%. That's an enormous difference. Add on to this, banks are stressed given years of new loans surpassing new deposits 8/n
NPL rates are bogus and wound so tightly any hiccup could cause enormous ripple effect. Chinese banks baseline on reports has been a true NPL rate of 8%. Stress tests said that NPLs would rise rapidly if growth fell to 4%. The government officially has the capacity 9/n
to expand fiscal aid to combat the slowdown but they can't really lower interest rates and banks can only continue lending because they keep lowering RRR. There isn't the ready cash in banks to lend the government money. Foreign investment is a drop in the bucket. 10/n
Seemingly only way to really fund a surge in new government debt is for the PBOC to really start buying in a big way. This of course puts pressure on the North Korean capital controls which are likely under enormous pressure already. As I have talked about for some time 11/n
China is managing trade because it absolutely HAS to generate that FX surplus and if it doesn't come from the US it's going to come from someplace else. This is why import substitution is huge emphasis. They expect to leak and they need to fund growth so this is the number 12/n
We need to hit. With system wound this tightly heading into this maelstrom, they either have to accept real pain or they have to make more stuff up. Signals are mixed. I don't think they know what they are going to do yet. They announced they just won't recognize bad loans 13/n
That doesn't solve anything. Reality is if the Chinese economy doesn't get back to normal pretty soon, these financial fires aren't going to be campfires but infernos. Even before this, exporters to China talked about upwards of 6 months to get paid and accounts receivable 14/n
Domestically was upwards of 4 months. We're now at 5 weeks of minimal cash flow and 4 weeks from activity resumption at a minimum. If China starts facing 12 weeks of minimal cash flow, this could get very ugly.
