China needs to do something to turn things around. That much is clear, even if nothing else is.
This week was an unmitigated disaster for the world’s second-largest economy. From terrible data to a 16-year low for the currency to a meltdown at the heart of the country’s shadow banking complex, the Party’s problems are proliferating.
As structural problems tend to do, China’s issues are feeding off of, and back into, one another, in what Nomura’s Ting Lu on Friday described as an “ongoing downward spiral.”
Analysts are increasingly predisposed to the idea that some version of helicopter money is the only way out for Xi, or if he has other options, he’s running out of time to avail himself. Certainly, markets are running out of patience. Hong Kong shares are in a bear market, and authorities in Beijing are resorting to a familiar set of desperate tactics to put a floor under A-shares.
It’s very unlikely that China will hit its growth target this year, and some fear that barring swift intervention, a recession is in the offing — or a recession “with Chinese characteristics,” if you like. For China, a recession almost surely wouldn’t involve multiple quarters of economic contraction, and even if it did, the Party would never admit it. Rather, a recession in the Chinese context would just mean growth that bears little resemblance to the pace investors were accustomed to pre-pandemic.
Nomura’s assessment of what’s needed to avert a worst-case scenario echoed the sense of urgency heard around the world, even as the bank expects China to “significantly ramp up policy support” going forward.
“At some point in H2 (with the risk of extending into spring 2024), the growth slowdown might get worse, a rising number of developers could start defaulting, some financial institutions may get in trouble, more LGFVs might have to restructure their debt and home buyers might get increasingly impatient while waiting for delivery of their purchased new homes,” Ting Lu wrote, adding that although it’s “difficult to predict the exacting timing, we reckon it will eventually happen.”
I reckon so too. While fully acknowledging the Party’s adeptness at balancing competing priorities and penchant for escaping mostly unscathed from perilous macro conjunctures, this time feels different.
If you ask Nomura, effectively addressing the myriad challenges will require the Party to “play the role of lender of last resort to support some major troubled developers and financial institutions, play the role of spender of last resort to boost demand and lift restrictions on the property sector in big cities to raise both demand and market confidence.”
In other words: China needs fiscal stimulus to avert a balance sheet recession, monetary policy support to prevent financial calamity and a relaxation of what, in some cases, are still stifling limitations (“red tape” is too obvious a joke) across Chinese real estate.
For their part, SocGen’s Wei Yao and Michelle Lam were unequivocal. “The message is loud and clear: China is experiencing all-out deflation,” they wrote.
“Rate cuts in a deflationary environment are unlikely to be effective in reviving aggregate demand, but they are necessary to buy time for debt restructuring,” Wei and Lam went on, before making the case for a serious fiscal push. “In order to revive demand quickly, we think the more effective policy option at this junction would be to embark on a central government-backed consumption stimulus” push, they said, adding that although Chinese policymakers “do not favor this option, it looks increasingly inevitable by the day.”
The silver lining, if there is one, is just that Chinese banks can’t really fail. “Despite our relatively cautious views on its growth prospects, we don’t think China is faced with any imminent major financial disruptions thanks to the dominance of state ownership,” Nomura remarked.
Is coverage of China’s recession nearing the “on every cover” media peak? Is Xi getting spooked enough to reach for his stimulus bazooka? The action in commodities hints at it.
I’ve wondered why BHP and RTP have been so relatively bid. But not all miners.
Maybe a knee jerk reaction from the good old infrastructure stimulus days. But it seems that the PRC is hinting at a more consumer goods approach?
Thanks, Walt for the perspective of possible options and tools China may exercise to address their troubles. It’s interesting to consider armchair economics from the China viewpoint, not a perspective of the US or other western economies. Frankly, I’m not used to it. Normally, China’s economy is in high gear, going 120 MPH. And I think of them as wanting to be in the lead, and to “catch up” with the US. And they are definitely doing so.
In fact, for 40 years US presidents Nixon, Ford, Carter, Reagan, Bush (Sr.), Clinton, Bush (Jr.), and Obama visited China and engaged with China to encourage constructive economic and political dialogue. Both sides benefited. But since Xi has been the supreme leader and steward of Chinese prosperity and well-being, he has exercised a different approach in relations with the west, and the US in particular. He’s not being very nice. Joe Biden has recognized China’s change in posture, and Joe does not abide.
There is a reason for China to have more than a little confidence, especially now. The Global Times and Bloomberg have both reported recently that China is making breakthroughs in the development of microchips. In addition, the Guardian has noted that American firms want to invest more in Chinese chipmakers to capitalize on their success.
Since taking office, Biden has limited the flow of microchips to China and investments therein. As of July 2023, he’s considering greater restrictions, especially those related to the development of chips that can support artificial intelligence (AI).
I can understand Biden’s position and actions. While the steps he is taking are not ideal, we are not in an ideal world. Additionally, from my perspective, with regard to China, it’s not the 80s, 90s, or 00’s anymore. Hu Jintao no longer leads China. And Xi Jinping not only leads China, he puts himself and his party above his country – and everyone else.
Xi Jinping has a different style of presentation. He’s one of those “speak softly and carry a big stick” kind of guys. But he is evolving to become more of an old-fashioned “commie,” not unlike Putin himself, more than any political leader in the world.
China will continue to develop its own chips. They will compete. And they will sell their chips. But I do not disagree with holding them back a little bit by not selling them more sophisticated, western-made semiconductors. In terms of how they’re managing the state of their affairs in international relations, I think they’re creating the ongoing likelihood of negative consequences for their country, their economy, and their people, which is a shame. Even 20 years ago they were moving in a more positive direction. They’re turning inward now. They don’t seem to want to be part of the world community. It seems to me they want to dominate it.
Once upon a time I bought some Chinese stocks, but I don’t anymore. I do not trust Xi Jinping. Xi certainly doesn’t give any kind of a damn about the United States, except that he considers the US to be an obstacle, and he wants US dollars. And he would rather the Yuan was the global currency, of course. I don’t feel sorry for China right now, or for Xi, amid their current economic challenges. China has to stand up on its own two feet, just like every other country. And like everyone else, they make their own bed.