China’s Slowdown | The Big Conversation | Refinitiv


ROGER HIRST: Last week, when Donald Trump
signed the bipartisan bill requiring an annual review of trade between the US and Hong Kong,
it was seen as just another escalation in the ongoing trade tensions between the US
and China. But in many ways, those trade tensions are
detracting from some very real changes which are taking place within China, ones which
are equally important to today’s investors as those trade tensions themselves. And that is the big conversation. Any discussion on China is polarizing and
individual investors are themselves incredibly impassioned. But I want to focus on the current market
economic transitions and briefly how we got there over the last 20 years. China’s GDP has grown from one trillion to
14 trillion in US dollar terms and is now closing in on the largest single country GDP,
the US. However, total GDP is a numbers game and obviously
China has a much larger population. On a per capita basis, China’s GDP is roughly
nine thousand dollars and it significantly lags the US at fifty six thousand dollars. But China’s impact on the rest of the world
has been huge. As we all know, China has created an unprecedented
demand for raw materials, was also adding a huge swathe of cheap workers and consumers
to the global labour force and the world benefited from this demographic dividend. But that may now have ended, and the authorities
in China have recognized the risks of relying on credit. Whilst debt is a useful tool to kickstart
growth, excessive debt is a game of diminishing returns. And is there an optimal level of debt? Well, in some ways, this is the very heart
of the current narrative and there’s no simple answer. But China has gone from using around two units
of debt for every unit of GDP growth to now using seven units of debt for every unit of
GDP growth. And that’s not really growth. That’s leverage. But for the rest of the world, things really
started to take off with China’s entry into the World Trade Organization on December the
11th, 2001. The Asia crisis, four years previously to
that was all about South Korea, Thailand and Hong Kong. In fact, China hardly warranted a mention. But China’s entry to the WTO also came at
a time of cheap and plentiful US dollars, in the crisis management of that post dot
com era. Now, although China’s economic rise has been
incredible in terms of speed, it is arguably unsustainable. And it’s this feature which fuels a vast amount
of the current debate. China’s greased the wheels of its own growth
through judicious amounts of credit over the last 20 years. Chinese credit growth has far exceeded that
of the US, even though its overall GDP still lags. The big question is, is that growth, organic
growth? China’s dilemma is combining GDP targets with
financial stability targets. Using excess credit to hit GDP growth targets
means that these goals are mutually exclusive and the Chinese economy is also very leaky. Much of this capital made its way out into
the global system by their insatiable appetite for raw materials or the issuance of U.S.
dollar denominated corporate debt. However, it also escaped by capital flight
as wealthy people diversified into other geographies. And the influence on house prices in places
like Sydney and Vancouver is very, very well documented. In 2009, when the world was convulsed by the
great financial crisis, China upped the ante with another round of credit fuelled demand,
which helped kickstart a commodity boom. And again, in 2016, a credit fuelled surge
in demand from China helped halt the commodity bust and profits recession that swept the
world on the back of a strong U.S. dollar. But already at this point, we had seen the
difficulties that China faced in trying to micromanage the economy. If the borders are open, capital can exit
as easily as it enters. When the US dollar rallied in 2014 and then
the Fed started raising rates in 2015, the gravitational force was for capital to leave
China. As the US became relatively more attractive,
Chinese FX reserves fell from four trillion to 3 trillion and I think most analysts would
suggest that 3 trillion of reserves are left. Ans China has only 1 trillion of liquid reserves
and the other two are tied up in illiquid assets and projects. There was an attempt at a mini devaluation
in 2015, but this simply accelerated the outflows from China and briefly unhinged global markets. This led to the Shanghai Accord and the aforementioned
capital injections in 2016. Time and time again, China was coming up against
the issue of a fixed exchange rate, an open capital account and domestic monetary control,
which you probably know as the impossible trinity. And you can only have two of those three. And maybe, just maybe, that 2016 is the last
time that China uses huge credit injections as a tool to manage economic growth, or least
economic growth at all costs. And although the beginning of 2019 also saw
a huge uptick in China’s new credit, there are two issues for global investors. One’s old and one’s new, the old one is the
diminishing returns. Whilst each new credit surge was bigger than
the last in absolute terms, it was smaller in relative terms because of the growth of
the economy. And the new one? Well, in 2018, the authorities indicated that
credit was no longer being used for growth at any cost, but now for selectively patching
up parts of the economy that have become unstable, like the banks or the indebted state owned
enterprises or SOEs. China is also in a corner due to the rise
in its inflation. Inflation remains a source of fear for the
leadership in China. Swine flu may be the catalyst for the high
CPI prices, which is in stark contrast to producer price index PPI, which has sunk back
into negative territory. But authorities will be reluctant to reopen
the credit spigots until CPI inflation has re based. So what are the signs today that this time
is different? Well, this time round, unlike 2009 and 2016,
we have not seen the surge in commodity prices and commodity stocks with this most recent
uptick in Chinese liquidity. Chinese economic profits growth has hit a
10 year low. Revenue for Macao casinos, the growth there
has once again dipped into negative territory. Still not as steep a decline that was seen
during the corruption crackdown and global profits recession a few years ago. But still, a sign of retrenchment. And GDP is being managed down. Low single digit GDP growth is far more in
line with developed economies than high single digit or double digit growth. And whether we believe the absolute numbers
or not, the trajectory is clear. China is changing. They are focussing on the internal economy
and moving away for investment towards consumption. And this will have a big impact on the outlook
for commodities. They are shifting their fixed asset investment
into global projects such as belt and road rather than domestic projects. And yes, commodities could receive a boost
from these or even the collective efforts of Brazil, India and Indonesia. But these countries will never mobilise resources
at the same scale and speed. The year on year change in global commodity
prices has been tracking China’s PPI which recently went negative again. So yeah, I mean, commodity prices, they are
poised to potentially squeeze as markets continue to price for a reflation re rebound and an
element of global synchronized growth. Speculative short positioning in copper futures
is extreme, so could squeeze higher, but it would be wrong to think that commodities will
be impacted as much today as they were during the rebounds that were previously fuelled
by China’s leaky capital. In terms of currency, the authorities will
want to avoid any dramatic moves. Managing transition is about managing volatility. The mini devaluation 2015 was a painful experience
and Shanghai is not yet fully developed as a financial centre. To do so would require far looser capital
controls. So there’ll be a reluctance to push Hong Kong
to the brink. And although the media fixation is with longer
term US China relationships, in the short term, China is unlikely to return to the growth
at any cost model. Commodity demand should stay sluggish. The preference will be for low, not high currency
volatility, and within that, trade tensions offer a two way risk of resolution or extension,
whilst window dressing ahead of the Communist Party’s 100 anniversary in 2021 is a potential
upside risk. But that is something for next year. There’s been a lot of chatter about the equity
markets surging into year end and the S&P 500 making new all time highs, even whilst
the global macro data continues to struggle. Investors appear to have priced for a turn
in the manufacturing data, and yet the majority of that data continues to remain sluggish,
even though there are signs of turns in some of the subcomponents. The services sector and the U.S. consumer,
on the other hand, still looks healthy. But even that data is now starting to lose
some momentum. So on the data front, let’s start with IS
consumer confidence. This figure was marginally weaker than expected. And yet it was the first time we’ve had four
straight declines since 2012. But what really matters is the speed with
which consumer confidence can turn once the trend reverses. And look how steep the declines were prior
to the onset of prior recessions. And although the recent number was high, it
is testing the 10 year trend. And furthermore, of the subcomponents, the
jobs plentiful, minus jobs hard to get as an indicator fell below zero. It has done this on five prior occasions in
the last 30 years, and three of those preceded recessions and one of the others was during
the recovery phase after the great financial crash. This is the first time it has dipped below
zero since 2008. Interest rates on U.S. credit cards have recently
been making new all time highs. Now, some of this does represent a wider variety
of services on offer, but it’s still fairly incredible given the absolute level and direction
of us overnight interest rates. Auto loan delinquencies have also been rising
back towards the post crisis highs. In dollar terms, because of the rise in auto
loans in total, the value of auto loan delinquency today is far higher than in 2010. And what about other global data points. Exports in China, Japan and Korea remain sluggish,
as do imports. In fact, we have just seen the fourth consecutive
monthly year on year decline in global trade, which is the longest stretch since 2009. And it’s clear that the whole of 2019 has
been fairly weak. China profits, as we’ve just seen, are also
weak. European and global manufacturing PMIs might
have bounced, but remain tied to the recent lows and global auto sales are on the back
foot. Daimler has just followed on the heels of
Audi in announcing substantial job cuts as they try and adjust to these structural changes. And EM currencies are also on the back foot. The JP Morgan Emerging Market Currency Index
has been making new all time lows. In the US,? Well, the Fed is adding yet more liquidity
to overnight markets, with operations now in excess of 100 billion and it has usually
only operated on this scale during previous recessions. So whilst the behind the scenes data still
looks poor, the bets on the equity market, particularly the US equity market, have remained
robust and perhaps none more so than the volatility index or VIX futures, where the short position
has reached an extreme. But in terms of sentiment, the short VIX futures
and the recent all time highs on the S&P 500 show that the market feels that the central
banks have their backs. And this is why politics have in many ways
superseded economics and corporate profits as the key driver of markets and especially
equities. Central banks can subsidize the economy, but
not indefinitely. But they have very little influence on tweets
about trade disputes. So as long as the politicians are quiet, the
central banks continue to manipulate volatility. But remember, we are always just one tweet
away from a turn in the equity market. At the beginning of November, we covered the
UK election and we tried to work out what the outcome would be based on what markets
were pricing in. At the time, it looked like a conservative
majority. Today, we’ve seen a few polls which suggest
that the majority could be as high as 60 seats. So what should the market be pricing here
and what should we expect? Sterling itself hasn’t really moved. Its in that 128 to 130 range and I think that
part of the reason is because that majority could lead to complacency so the market doesn’t
want to get ahead of itself. But nonetheless, if the conservatives get
a working majority, we should look for 135 to 140 on sterling. It is considered to be a very undervalued
currency. In terms of the bond market, we should expect
yields to rise. The reason behind that is the Conservatives
and Labour are both expect expected to spend more. And I think that that should see convergence
between, for instance, the UK and the US 10 year yields. I wouldn’t put that trade on in an outright
sense because global factors such as global trade may be more of an influence. In terms of the FTSE, the benchmark UK index,
they’ll actually underperform because it’s related to the performance of Sterling. When Sterling goes up the FTSE100, which earns
a lot of its revenues overseas, often starts to underperform European benchmarks. So the FTSE100 will underperform, for instance,
the DAX. But within the UK I think there’s some really
good opportunities. We could look at things like the real estate
sector. We should expect things like Brexit to come
to a soft conclusion in January. So this should open the UK back up to foreign
direct investment and also internal investment, which should be good for both private and
commercial property. So the footsie 350 real estate sector should
finally start to perform and you could put a short on with the FTSE100 which should underperform
given the move in sterling. What are the risks? Well clearly the risks are that from here
to December the 12th, we see this majority whittled down in the polls to what is closer
to a hung parliament and then we’re back to square one. And obviously, if you’re long the FTSE350
real estate sector versus the FTSE, that would be under pressure. But Sterling should go up, property should
do well, yields should converge and we should start to see a return to pre 2016 levels,
if the conservatives maintain a majority and get that through the election itself.

46 Replies to “China’s Slowdown | The Big Conversation | Refinitiv”

  1. If China collapses, we will face the worst humanitarian crisis in human history. Worse than the Indochinese refugee crisis and the Syrian refugee crisis by 1000 times over.

    It is feasible that Trump administration want to neuter the Communist Party of China from ever becoming strong on the global stage. This can easily be achieved if he won the second term, likely will happen. The US made it clear that it won't make China collapsed but probably splitting into multiple countries is more likely. China stays better as a federal republic.

  2. It won't go well for the leadership in China if they want the people to buy more stuff but continue making it expensive and difficult for quality foreign goods to be imported. Also, the amount of money that Chinese need just to get a decent apartment is quite astronomical. It literally takes the entire family coming together to have the down payment to get the bank loan for one home, and even then the mortgage rate is ridiculously high. When looking at the GDP per capita of China and comparing it to the US, it's mind-boggling for me to understand how the people in China can accept these circumstances. No wonder they were taught to keep their families close and live together with their parents — if they didn't do this, then they wouldn't be able to afford their own homes and would probably revolt.

  3. No offense, but I see a slowdown in China, but China is still dominating! Of all central banks, China is the strongest and most stressed.

  4. Slow down is not only happened in China. Be patient, more and more tradings between countries all along BRI routes, both land, and marine are coming up one after another daily when infrastructure is done. moreover, China is a debtee with plenty of federal reserved. China is not an index market-based economy. If the US collapsed, nobody is to help this time.

  5. GDP is a measure of activity. GNI is a measure of income. For China GNI/GDP ratio is 0.5. PPP is a relative measure of local buying power compared to the US dollar. For China it's 3.5. The US is 1.0 by definition. On 23 trillion dollars a year GDP adjusted for PPP China is around 23 trillion dollars a year. But GNI not adjusted for PPP it's no more than 3.5 trillion dollars a year. This is how much money it has to spend on imports like oil, iron ore, coal on the world market. The US is 18.5 trillion dollars a year on a GDP of 22 trillion dollars a year.

    China has 900 million people living on 10 dollars a day or less. In rural areas it's 2 dollars a day or less. There are no social safety nets so Chinese need to save their money. But they've gone on a wild speculative home buying spree with borrowed money. The housing market bubble in China is the largest in history with at least 50 million new unsold homes often of poor quality.

    The yuan has fallen below the psychological threshold of 7. China really is paying for US tariffs. Europe is in big economic trouble. Its corrupt and incompetent banks are in a lot of trouble. Christine Lagarde just said GDP growth is 0.2 percent. The EU economics, social, and political situation are in chaos. The US trade war against China is likely to escalate. The US dollars rise seems irrepressible.

    The world is drowning in things, exports from China, cars. Prices are falling. In a recession or depression cash is king. Money seems to be gravitating towards the US. Between the backing of the Fed and the ability of the Department of Treasury for all practical intents and purposes the US appears to have limitless financial resources while the rest of the world is going broke. America first means no more endless handouts. How can an empire in decline if it really is an empire bully the entire world? Only in someone's dreams. BTW, economic data comes from World Bank.

  6. I wonder if China's plan is to (1)stall to 2020 and hope for new president and (2)meanwhile trick Trump into removing tariffs with false promises
    …and I wonder if Trump sees through China's strategy and so…
    Trump's plan is to (1)strong arm China to making upfront concessions while (2)talking about how great the trade deal will be to keep the stock prices up.

  7. Consider putting your savings into Bitcoin. This 'internet money' will become THE global currency over the next 5 to 10 years. Follow it, hold it, and watch its value fly as its capped availability is reached!

  8. Remember in early 2019 when every YouTube channel was screaming “recession” and the apocalypse? Imagine if someone told those people that the S&P would be sitting at 3,100 after 2 days of “sell-offs”. Consumer numbers dropping before the holidays is obvious to anyone. Americans spend an absurd amount of money during Christmas and save during the months prior to Black Friday.

  9. Every political and economic announcement in China is fake, so only well connected people inside China know. Chinese stats are like a fairy tale illusion. Fake it until you hopefully one day make it.

  10. Stop speaking Chinese and speak English. The world is entering a great depression which will wipe out the financial system.

  11. What slowdown. There growth Rate is still over 6 percent.
    Its natural as there base grows there growth rates will moderate.

  12. Holy cow, does this guy even know PPP? China is running a trade surplus and is growing at a level that can only be envied by the West.
    When the 1% discussion is slowly morphing into yellow vest protests, it seems to be odd to claim China has "problems", while everybody can see that the US Congress is particularly zealous in producing those problems for China.
    Don't know about you guys, but big European pension funds are investing like crazy in China. The demand for low-risk exposure to the Chinese market is insatiable…..Don't want to be part of the future? Ok, knock yourself out…..

  13. The Chinese are micro managed by a pig farmer who couldn't even do that right and who had to come to Iowa to be taught how.

  14. analysis without showing US debt bubble crisis is merely a bias to frame audience. When China printed money to built infrastructure and development, US printed money to feed Wall Street. Where is money flow do matter.

  15. The Chinese miracle is coming to an end too many factories mfg. too much stuff which the world can no longer afford to purchase. This trend is permanent. Read a book The Age of Oversupply.

  16. Slowdown where I'm in China now and I don't see it. It look like things are booming now . I don't know where you get your so called facts from but whomever you get it from THAT PERSON LIED TO YOU the only way to know is to go to China and see for yourself. Never listen to lying media.

  17. Fact is Democrats were ready to Bow to China til Trump came along. Nancy Pelosi isn't worth 200+ million because of her business skills. Her husband does business with China and she makes sure everything goes smooth. Same with a lot of top Democrats. They take a lot of money from China, like Biden and his son.

  18. What is now known as China was before a number of kingdoms who had the brilliant idea and, in fact, were the first to use Fiat currencies to expand their economy and boost their armies to dominate their neighbours… unfortunatelly, they were also the first to find out, some thousand years ago, how a Fiat currency ends… utter economical armaggedon…

  19. China will face a catastrophe,they managed to hide their books from the World preventing accurate diagnosis of financial stability.China's deception and thievery of intellectual property exposes their untrustworthiness and lack of credibility.

  20. Of course, Mises and Hayek would say that framing the question in terms of an (1:33) 'optimal level of debt' is to misconstrue the issue. The real question is whether malinvestment is creating resource misallocation at the most fundamental levels, and whether this misallocation can only be eliminated by society-wide bankruptcies and general institutional failure-which, if it would be seen as responsible-might even in the 'worst (best) case scenario' involve the Communist Party itself.

  21. You can thank Bill Clinton for making it possible for China to do what it's doing. The Clintons have done a LOT for Communism in the world.

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