Thread by @AtifRMian

Prices are increasingly less likely to be informative for understanding where Chinese economy is heading

The latest Evergrande bond deal (see link) is the likely template for all potentially systemic events ...
ft.com/content/d1f2a7…

Since the state essentially owns the financial sector, it will bank-roll debt rollovers via central bank if necessary

All of this will minimize price impact on financial assets - and hence financial contagion will be minimized ... this is likely to be the state's goal

So does that mean all will be well?

No, it just means that prices are no longer informative.

We need to look elsewhere to figure out the *real* health of the Chinese economy

I will point out two broad areas of concern.

First, real estate accounts for 29% of Chinese GDP according to Rogoff and Yang (link below)

This output critically depends on *new credit flows* into real estate sector
voxeu.org/article/can-ch…

It is this *quantity* of credit flow that really matters for output - and chances are that this flow will dry up, at least if the state's "three red lines" are going to have a bite.

So look at what happens to new capital formation in real estate, and relatedly consumer spending for households who own properties

These are the first big downside risks to focus on

The second area of concern is local government spending.

About 1/3 of local government revenue was from land sales, that source is likely to dry up fast. And local governments have over 8 trillion dollars of debt to pay back

So we are looking at local government austerity

More likely the central government will step in to provide support, but it is not going to be easy

In any event, focus on quantities , not prices when it comes to china