Thread by @MacroAlf

Evergrande panic? I can almost hear you asking for it...here is your Chinese thread!

From a panoramic macro perspective, chances that a widespread financial market panic unfolds are relatively low - it will mostly depend on the Chinese authorities reaction.

1/n

The chart below shows the % of Chinese households wealth in real estate - 74%, quite high.
For comparison, US households own <30% of their wealth in real estate.

This tells us:

- The Chinese economy is not very financialized
- Real estate matters for the CH household

How much?

74% of wealth concentrated in real estate is quite a lot, yes.
But 74% of what?

The chart below shows Chinese HH net assets (value of assets - liabilities).

In 2019, Chinese household net assets were RMB 500 trn = approx. 70k USD net wealth per each Chinese adult.

Pretty solid

So, how did China achieve this 15.5% CAGR in households net worth?

If you follow me, you probably know the answer already: credit creation.

China alone created more credit than ROW together over the last 20 years.
Credit creation = increase of private sector wealth.

Now, back to Evergrande.

If credit creation increases the net wealth of the private sector, credit destruction does the exact opposite - it drains resources and net wealth from the private sector.

The Chinese private sector war-chest is solid, but deleveraging is tough business

Chinese authorities hold the keys here: what will be their response?

So far, they have come up with reverse repo liquidity injections. The PBOC lends cash (well, bank reserves) to banks at a fixed rate and for a fixed period in exchange for securities.

Cool, but does nothing.

Banks don't lend reserves (yes, it works the same way in China too)
They expand credit when there is a decent risk/return in doing that, and now there is not.

The credit impulse in China is unlikely to head north unless Chinese authorities intervene differently.

Basically, the CCP needs to ''encourage'' state-owned enterprises to borrow and banks to lend a bit more forcefully - they have done it big times in the past, it wouldn't be news.

That would spur credit creation and push up economic activity and asset prices.

For context, that's how the Chinese credit impulse was looking like before entering the Evergrande saga.

Sizeable action is needed.

What about worldwide contagion?

The Chinese economy has still high entry barriers for foreign investors.

For instance, foreign investors % allocation to Chinese stocks is in the low single digits despite China accounting for a large share of global earnings and growth.

As the domestic economy is not highly financialized and foreign investors are still underinvested, the chances for global widespread contagion are not incredibly high.

Amundi and UBS are amongst the biggest European owners of Evergrande (and Chinese) bonds...

...and today they are down, but only slightly more than what their usual beta to the Eurostoxx 600 would suggest.

Amundi is down 4% (beta 1.05) while the Eurostoxx 600 is down almost 3%.

Chinese CDS is on the rise, high-beta risk assets are suffering, DXY is heading north.
All classic signs of a moderate risk-off.

Watch the CCP reaction to closely understand how deep the sell-off and damage to the Chinese consumer demand can be.

The end.