A short thread.

In my May 21st report, I argued that Beijing's latest property rescue package will NOT work this time for two major reasons:

https://twitter.com/business/status/1802607134468604281

First, Chinese households are already over-levered. As a percent of disposable income, Chinese households’ debt level is one of the world’s highest. As such, the poor status of household balance sheets is the biggest constraint facing another debt binge in the property market.

A thread long overdue (1/5):

Despite rising investor optimism, this chart is what worries me the most. It shows that we may have entered the first episode in China's post-GFC history where credit demand from both households and corporates is falling at the same time. 2/5

As mentioned in the past, the secrete behind China's success of maintaining a heathy growth amidst a property crisis over the past few years is that Beijing has managed to surge credit to the industrial sector, which has benefited tremendously from strong external demand.

A bit more thoughts on this from one of our recent reports:

"There have been five deflationary episodes in Chinese economy since the early 1990s, with each one of them being reversed by a major policy pivot that unleashes tremendous demand.

https://twitter.com/ShanghaiMacro/status/1681602851003592704

The deflation caused by the Asian Financial Crisis was reversed by the 1998 reforms that comprehensively liberalized the country’s property market.

The 2002 brief deflation caused by the US recession ended with China entering the WTO and accessing the global market.

Richard Koo has been one of my favorite macro thinkers. I have always believed that his thoery on balance sheet recession will prove to be extremely relevant for China one day. Yesterday he gave an extraordinary speech on China's Japanification risk, below are the main takeaways: 1. China is likely to enter a painful balance sheet recession that may take many years to recover.

2. China should not waste time on monetary policy and structural reforms. Instead, it should concentrate its efforts on fiscal stimulus to keep the economy running.

This article provides a really good analysis on China's youth unemployment issue. Here is a rundown of the most interesting and concerning statistics:

1. A total of 54mn job loss over the past three years, of which 15mn are college graduates who are...

mp.weixin.qq.com/s/0FiRxcLXMq6n… ...unable to find a job, 21mn due to corporate layoffs, and 8mn migrant workers forced out of cities due to the pandemic.

2. The average number of employees at A-share listed companies shrank by 11.9% compared with pre-pandemic levels.

3. 10% of SMEs closed in 2022.

Just to be clear, this is surely a step towards an eventual launch of property tax. However, “eventual” could mean that it is still five if not ten years away. The chance of it happening in the foreseeable future is close to zero, in my opinion.
reuters.com/markets/asia/c… Given the ongoing property weakness and depressed animal spirits among both households and developers, I do not believe that Beijing has the guts to do it right now, while risking inducing a complete crash in property prices.

A thread.

The most concerning development in Chinese economy today is the entrenched deleveraging among households. Without sufficiently boosting household income and confidence, there is no way that the recovery in property sales and consumption can be strong and sustainable. Given the retreat of the household sector, Beijing has thus far relied on SOEs to expand credit and balance savings. The problem, however, is that state-directed credit expansion is increasingly inefficient and will inevitably lead to a further rise in debt levels.

Since many of you asked about this, let me briefly reply here why I would not take this too seriously. First, if you read the Chinese version, NHC made it clear that this was a meeting to learn the spirit of the 20th Party Congress.

https://twitter.com/Sino_Market/status/1587787687863365632

In other words, this meeting focused more on politics rather than on policy – the first two major paragraphs are simply about the historical significance of the 20th Party Congress. This means that it is clearly not a policy-oriented meeting.

Here is another reason why investors should start to watch China closely. Given growing economic weakness and poor local fiscal condition, the PBoC has quietly restarted the PSL facility, under which the central bank directly provides loans to policy banks for their re-lending... During the 2015-17 stimulus period, it was the creation of the PSL facility that allowed Beijing to push through its shanty town renovation program, which effectively placed a bottom in Chinese credit and economic growth while caused a surge in commodity prices...

A thread.

China is currently experiencing the strongest heatwave in six decades, with temperatures crossing 40 degrees Celsius in dozens of cities. The extreme heat has caused a power imbalance and forced local governments to impose draconian restrictions on electricity usage. The average temperature in the ten major cities along the Yangtze River is currently six degrees Celsius above the average level over the past five years.