Thread by @Trinhnomics

Yes, agreed if u zoom out. Most people are easily fooled. Activities went from 100 to 50 (-50% drop) & grows to say 75 (+50% increase) if u calculate % change it looks V shape.

But income wise, u are down for the year! Easy to grow from a lower base.

Q: What about debt?

https://twitter.com/CNBCJou/status/1234503632059588608

That is what that OECD paper is about: in ALL scenarios we are DOWN & China growth -80bps & V-shape recovery won’t save us & we still LOST output in key sectors.

Question: Did debt get erased by the same magnitude?

A: No, it didn’t. People w/ loss of income got same debt👈🏻👈🏻👈🏻

So let me show u this simply:

Monthly income:

Jan 100
Feb 50
March 75

Total 225 & growth in QoQ is down, assuming u would expect some growth (say last yr Q1 output =300)

Q2 say ramp up & output= 310 so QOQ massively up 310/225

Okay but H1 535 still lower than last year!

Say H2 you ramp up some more, still down for the year a lot!!!

Ok, let’s talk about debt:

System wise it is about 3 times annual income & for firms about 1.6 times & mostly short-term at high rates

Okay, so ur income in Q1 pretty down (225 vs expectations of >300) & debt high!

So u can’t service it if u don’t have plenty of cash. Most SMEs in China don’t have a lot of buffer & only 30% OPEN so they got cash flow problems given lack of income.

So? They reduce costs!!! They lay-off people/ask for unpaid leave/or just close shop.

That’s 60% of China GDP

Then u say gov support: so far we have seen some deferment of social security payments, some interest deduction, & targeted here & there.

But if SMEs are 30% open, then the marginal help won’t cut it. We need cash for cash flow issues. Or they cut costs & that is employment...

And let’s not forget that those that can open have to pay more to get workers so labor costs go up (good for those that have higher bargaining power).

So in short, income down in Q1, Q2 easy to have V-shape “recovery” but can’t make back lost time/income.

Meanwhile, debt high👈🏻