It seems that lately every time we come back from holidays look around, people are becoming ever more freaked out about China. Josh Brown has possibly the best headline of the latest lot. Josh’s shock and awe was prompted by a Barron’s cover story on China which we agree is a very good read, although it covers a lot of ground that’s already appeared here, among other places. Nomura’s 1-in-3 chance of a hard landing call, the economic imbalance, misallocation and over-capacity, property bubbles, Nicholas Lardy, unfavourable demographics, bad loans being rolled over, rising wages, capital outflows, and… you get the idea. Plus this eye-catching quote from Jim Chanos:
“I’m being conservative when I say that the coming bust in China‘s real-estate market will be a thousand times that of Dubai,”
And a few weeks ago, John Hempton wrote an extremely popular (and Krugman-ed) post that deftly linked modern China’s approach to government and governance with the huge, looming question of how on earth the country will rebalance its very strangely-shaped economy.
But what’s really kicked off this turning point? Although China bulls have become more bearish (the Barron’s story at least quotes one) many of these themes have been talked about by many of the same experts and investors for years now.
A nice explanation for the change of mood comes from Anne Stevenson-Yang, the co-founder of a small China research shop. Today’s FT points out that the recent PMIs almost certainly mean China has fallen below its all-important GDP growth rate of 8 per cent — and Stevenson-Yang explained over the weekend why that 8 per cent is so important:
Through the global downturn in 2009, one could see banners strung across streets in small Chinese cities exhorting people to “Maintain 8!” During the economic crisis of 1998 as well, as economic growth plunged to near zero, then-Premier Zhu Rongji is said to have instructed the National Bureau of Statistics to “give me something as close to 8 as possible” (reported growth that year was 7.8%).
Analysts used to claim that this goal was about job creation, but no one in China actually counts new job creation or unemployment; instead, they count the urban registered population without full-time jobs, because this population is viewed as a potential source of unrest. Employment has always been a security function in China; Chinese leaders (as opposed to foreign visitors) almost never even discuss job creation.
And why she thinks the falling below 8 per cent will be a problem:
Instead, I think the 8% target was all about marketing China as an investment destination. And now that the official number has dropped ever so slightly below 8, it turns out that the political goal was right: once investors stopped believing that China’s economy would always “maintain 8,” they started to focus on the blemishes.
She adds that, “as China’s export surge receded, the rocks below were exposed”.
It’s funny because this all comes just a few days after a couple of China strategists we have a lot of time for — Stephen Green and Standard Chartered and Zhiwei Zhang at Nomura — both published notes urging their clients not to freak out.
More specifically, Zhiwei says bearishness about China is becoming overdone and the poor showing in Q2 will inevitably lead to more easing measures. Plus, he adds, there are already some signs that existing easing measures are beginning to work: such as May data on loans and electricity consumption.
Green meanwhile pointed to signs of improved demand for property (albeit on the back of discounts) and falling levels of new construction being completed.
Of course it would be ironic if China was on the verge of a turning point towards stability and strong, sustainable growth just as the China bear story goes really truly mainstream.
All told, however, we’re maintaining a sceptical view here at FT AV. Too many questions about the financial sector, real demand, imbalance, and reform. Not to mention politics.
Why China’s Rmb exodus is THE story – FT Alphaville
The macroeconomics of Chinese kleptocracy – Bronte Capital
Xi Jinping Millionaire Relations Reveal Fortunes of Elite – Bloomberg
China real estate unravels – Patrick Chovanec
A fate worse than a hard landing for China – FT Alphaville
The ways China can rebalance – Michael Pettis
China tells banks to roll over loans – FT