I’d apologize for spending so much time on China’s multi-faceted, rapidly worsening economic crisis if I were sorry. But I’m not.
Xi’s totalitarian turn is partly responsible, and there’s no excuse for totalitarianism. Although shrouded in egalitarian Party-speak, Xi’s “common prosperity” push was part and parcel of a larger effort to control all aspects of Chinese society and otherwise subjugate anyone and everything to his “Thought.” It’s unnerving, for lack of a better word.
Although ostensibly separate, the property crackdown ended up a parallel project, and like “common prosperity,” it was justified by a lot of high-minded rhetoric. “Housing is for living, not speculation,” was the most famous example.
Whatever Xi’s goals, the combination of i) the Party’s draconian approach to pandemic containment and ii) simultaneous attempts to rein in ostensible “excesses” across the tech sector and real estate, ended up sowing the seeds for an acute crisis of confidence with far-reaching implications. And here we are.
News flow out of China this week is unrelenting. In addition to reports that the government dispatched police to the homes of citizens who invested in wealth management products sold by Zhongzhi Enterprise Group, the trillion-yuan conglomerate at the heart of China’s burgeoning shadow banking crisis, reports indicated that Beijing instructed policy banks to “step up” intervention in the FX market to defend the yuan, which is the weakest against the dollar in 16 years.
So far, officials have mostly relied on stronger fixes to slow the currency’s depreciation, but as the updated figure above makes clear, that option is increasingly inadequate. When you’re having to lean 900 pips into it, it ain’t workin’, if readers will forgive the momentary lapse into a colloquial cadence.
Next steps are clear if past is precedent. Beijing will either raise the reserve requirement on FX forwards, cut banks’ FX reserve requirement ratio or both. The PBoC apparently wants to defend 7.35.
Paranoia is setting in. Officials are also rumored to be conducting checks to determine if corporates are exacerbating the currency’s slide with speculative bets. The PBoC’s quarterly monetary policy report, out on Thursday, found the central bank promising to guard against “over-adjustments” in the yuan.
As discussed here on multiple occasions this week, the PBoC is in a tough spot. They’re easing to fight the deflation and generalized economic malaise weighing on the currency, but that easing is itself an excuse for depreciation. The same is true of liquidity injections.
To be sure, the central bank can stop the slide if they really want to. Asking if a determined PBoC can put the brakes on yuan weakness is like asking whether an irritable BoJ can cap JGB yields. The answer is “yes” when push comes to shove, and the yuan has anyway done ok against currencies other than the dollar.
But there’s an unmistakable sense of panic in the air. The Party is losing control on multiple fronts. Of course, we’ve been here before. On countless occasions. The odds of collapse are much lower than China bears would have you believe.
China’s citizenry is a captive populace that sees no chance whatsoever of regime change, and holds out no hope for any sort of democratic transition. When it comes to financial instability, someone will ultimately fall on the grenade. Then someone else will fall on their sword. Neither of those people will be Xi.
You’ve been spot on to focus on China with a nod to Japan as well.
As you point out, we can cheer for Xi’s humiliation, but who could or would replace him? As the case with Putin.
Do we expect regimes that will introduce free (as opposed to rigged) elections and a total shift to “free market” capitalism?
Then lift our eyes a little. It’s been three months since the elections in Thailand and still no government has been formed.
Or check out Jav Milei in Argentina as the October elections draw closer. Even our “stauch ally” Modi seems to have steered into some headwinds. Scare quotes due to India’s major role in evading sanctions on Russian oil.
I guess we should be thankful here in the US as long as Trump’s sway keeps fading. Unless the alternative is DeSantis.
China and Thailand can take some shade on elections but in the recent past Belgium (you know, our NATO home) spent over a year trying to get a government together after an election. And Italy … well since WWII, about 75 years ago, they have had 69 new governments. They still can’t get the hang of that election thingy.
China seems to be on everyone’s mind today. Here at the Heisenberg Report, I’ve certainly shared a comment or two about China.
I like to comment about China’s leadership, the tendency they have to presume their inevitable supremacy in the world, and I’m amused by how they brag about their army, their army-navy, and their air force . . . But then there’s the matter of how they manage property in China.
China’s crazy property sector is truly the “forever problem” of the country. Why on earth do they still have all those empty apartment buildings? It’s crazy! What’s up with that? Didn’t Evergrande default last year? How did Evergrande even make it through Covid?
They can manage, as they have thus far, to skirt their property problems. But they’ve really bought a load of %&#t, not only with the properties, but also with their own country, and with the world. Sure, they’re good managers. But people in countries that may need a friend with money are already learning that the Chinese will foist on them untenable volumes of debt and they are not to be trusted.
Xi really looks sharp in that grey communist party garment that buttons up near his chin. But the party needs to be about more than Xi. They need to loosen up and think more broadly about their possibilities in the world, not by being great at the Olympics, but by how they can actually win friends without lying and trying to steal their money. Xi should off-load the starched garments and pretentious conventions of the communist party. The Chinese economy will only worsen if he continues to stick with this one-man emperor thing that he is doing now, whatever the communists call it.
I know China’s possibility for continued, growing, economic success in the world is fairly likely, even though they look down on countries in Africa, Asia, the middle east, and South America, and seek to take advantage of them by stealing their land in whatever way they manage it. But I still say that China handicaps its own country as long as they have communist one-man rule.
What else can I say? How about Vladimir Putin? A similar style to be sure.
And Evergrande filled BK in NY (I assume this is for its US assets, and that there are equivalent filings in China?).