It’s not going well in China. Still. It’s still not going well in China.
Beijing on Monday released activity data covering May and the story was familiar: The property market’s mired in an intractable malaise and domestic demand’s moribund. (Womp, womp.)
Although the pace of retail sales growth picked up for the first time in six months, 3.7% counts as tepid in China. For context, monthly retail sales prints averaged an 8.6% YoY gain from January of 2018 through December of 2020 (so, during the two years leading up to the pandemic).
May’s print did manage to top estimates. Economists expected 3% from the retail sales headline. Do note: That’s exactly the gain Beijing might’ve reported were it not for a holiday boost. Stripping out Labor Day spending, sales probably rose right around 3% from the same month a year ago.
May marked the fifth straight month during which the pace of industrial output growth outstripped retail sales. That, even as retail sales beat and IP disappointed, rising 5.7% against expectations for a 6% advance.
“The supply side and external demand remain more robust than domestic demand, despite the moderation in industrial production growth,” SocGen’s Michelle Lam said Monday. “Retail sales did better than expected but were still very weak, as was inflation.” Data released last week showed consumer prices rose just 0.3% YoY in May, while producer prices spent a 20th month in deflation.
So, this is still very much a “two-speed” affair. And that points to tension between Beijing and many of China’s trade partners, some of whom aren’t enamored with the idea that the rest of the world should soak up China’s excess capacity in order to bolster Xi’s exports and flatter China’s topline GDP readouts, particularly if it means irritating Western electorates who’re now wholly disenchanted with… well, with damn near everything on the off chance you haven’t noticed. But with China specifically.
Gallup last polled Americans on their “overall opinion of China” in February. Just 4% had a “very favorable” opinion, unchanged from 2023 and 2022. A mere 16% described their view of America’s foremost strategic competitor as “mostly favorably,” and that was actually a marked improvement from 2023.
As the figure shows, public opinion went off the rails beginning in 2019. From there, things spiraled. The “Kung flu” — as a by-then “no cares” Donald Trump dubbed COVID four years ago this month — didn’t help.
The Biden administration unveiled new tariffs last month, Europe’s doing the same and on Monday, Beijing indicated China will open an anti-dumping probe on pork imports from the EU, a nakedly political move and retaliation for Brussels’ levies on Chinese EVs.
Again, part of the problem’s domestic demand in China. Simply put: Chinese aren’t buying enough. The issue shows up everywhere, from retail sales to imports to CPI to credit aggregates.
New yuan loans were just CNY950 billion last month, nowhere near estimates. The growth rate for the total stock of CNY loans now has an eight-handle for the first time ever.
You can trace that to Xi’s property crackdown and also to the body blow sentiment suffered during the 2022 lockdowns. Those curbs were wholly dystopian and, more importantly, wholly anachronistic given the availability of the mRNA vaccines.
Monday’s data showed new home prices in China fell more than 4% YoY in May, the most in nearly a decade.
Prices of existing homes fell 1% just from April, the largest month-to-month decline since record-keeping began in 2011.
The rest of the housing data was just as bad. The cumulative YTD decline across a hodgepodge of aggregates worsened last month, Monday’s figures showed. Property investment was down more than 10% from January through May and property sales by more than 20%.
New construction starts and fund raising by developers appeared to stabilize, but the scope of the YTD drop for both remains staggering, at 24.2% and 24.3%, respectively.
Plainly, the measures China undertook to stanch the bleeding in May are insufficient. Shares of Chinese developers are in a bear market.
“There were still no signs of a turnaround in the property sector,” SocGen’s Lam remarked. “To be fair, one month is too short for the housing rescue package to take effect [but] the correction in house prices, which has intensified in both new homes and secondary markets, is not helpful, pointing to more urgency for policy to deliver,” she added.
The PBoC on Monday kept the one-year MLF rate unchanged for a tenth straight month.
If only there were some way that the ailing property sector (housing specific perhaps) in China… could aid the unafordability of the American housing market.
During globalization jobs went East. If we could just comprehensively get houses to come West… maybe everybody would feel better about each other?
deport people to China?
Apropos of nothing, but the images for your articles have always been great. Lately, they have been exceptional – well paired with your writing Walt, on many levels.
I’ve been thinking about how different the China housing crash is from Western crashes e.g. GFC.
Those with more knowledge, please correct or expand on the following.
In China, much of the “housing” is not actually housing. Apartments are delivered as uninhabitable concrete shells, never built-out or rented or owner-occupied, in largely vacant complexes.
They are basically just a financial asset that has no utility and produces no cash flow. In some or many cases, especially in secondary cities, they will never be occupied and can never produce cash flow, because China has hugely overbuilt “housing”, far beyond the population size and even farther beyond the population with money to pay rent. And China’s population is shrinking.
“ “How many vacant homes are there now? Each expert gives a very different number, with the most extreme believing the current number of vacant homes are enough for 3 billion people,” said He Keng, 81, a former deputy head of the statistics bureau. That estimate might be a bit much, but 1.4 billion people probably can’t fill them,” This quote is from 2023; naturally, Mr. Keng has not re-appeared to elaborate. https://www.asiafinancial.com/chinas-1-4bn-people-couldnt-fill-empty-homes-ex-official
So . . . a financial asset, without utility or cash flow, in gross over-supply, now falling out of favor with investors. Previously hyped and high priced, bought and built on margin.
How do you support the price of such an asset?
I question whether China, or any country, can. Especially with half measures.
Maybe China needs to find an alternative use for this “housing”. Vertical farming? Assisted living facilities for the West’s elderly? Let’s think out of the box, Xi.
China needs to get their consumers to spend. The best way might be to kill 2 birds with one stone. A retirement and health care safety net would unlock precautionary savings. China’s middle and lower classes need these desperately. If they had them, a lot of precautionary savings could be unleashed into consumer spending. Stranded housing assets need to be written off and sold.
I have studied housing since 1968, starting my doctoral classes and my subsequent dissertation on low-cost housing. The problem with it is that it, along with food, it is one of the two most important sectors of every economy, world wide. Shelter is also virtually monolithic, illiquid, and the most expensive of the assets individuals have to deal with. Developers who try to lead the economic cycle almost always over-build leaving a bunch of unoccupied dwellings that would already be sold if anyone could afford them. The average GDP in China is ~$12,500. Look at what’s in a house. A 1000 sq’ dwelling in China contains concrete, wood, copper, glass, etc. These items are commodities for which there is global demand so housing, while built with cheap labor, still costs much the same per sq’ in China as it does in more developed countries. The number of able buyers, while large, is dwarfed by those who need shelter but can’t afford what’s there. So now that the housing is overbuilt it won’t be going anywhere soon. We have a version of this problem in the US right now. Demand makes prices rise and so do higher interest rates, insurance costs and property taxes. Our problem won’t be going away any time soon either. When it’s not moving it shelter piles up. Always causes the same problem, every time, everywhere.