Via our goods friends at Gordon Johnson Research:
Can China Rescue Its Economy from Property?
No. The current downturn is driven by demand, not supply.
· What’s happening now? China’s economy took a sharp left turn in July. Construction starts down 17% YoY in September, following a 14.6% decline in August. Crude steel production down 21.5% September. Also cement, glass, aluminum. The stock of loans up ~13%. Banking authorities poured ¥500 bln into the economy October 15, told banks to speed up mortgages, and made a statement claiming that the Evergrande crisis can be contained.
· Expect loosening Q1: We think authorities will open up the credit spigots but not until the new year. They have too much hanging on a public commitment to reduce funding to real estate to drop the stance, yet. Besides, banks operate according to a credit quota agreed upon at the start of the year. Changing the 2021 quota would require a massive bureaucratic effort.
· Revival unlikely:
o Falling land sales mean lower revenue to localities. So do construction and materials declines. That means those governments can’t spend on new development. All pro-cyclical.
o Key issue is Chinese consumer confidence. Also banks’ willingness to issue mortgages.
o Government has far less visibility and control than people think.
· Consequences: First order: Australian ore and coal. Second: consumer spending in China. Third: equity value of foreign companies with big China businesses
· Energy shortages: Temporary, caused principally by bureaucratic mismanagement.
o The State Grid wants regulators to raise power prices. Power producers refuse to buy enough coal until that happens
o Years of capital investment in productive capacity has not been matched by expansion of coal mining. The government had hoped to wean the economy from dependence on coal and put more renewables into the mix.
o Anti-corruption campaigns in the coal-producing region of Inner Mongolia have led to some drops in the production and transport of coal.
· Coming deflation: The forces of inflation and deflation are in conflict. Prices are high but trending down. Over the longer term, we expect deflation to win.
· Dumping: When crisis hits, China typically subsidizes exports. Brace for a new era of dumping on international markets.
· Capital anxiety: Surging “imports” of high-value goods that are tough to value, like wristwatches, jewelry, and handbags, indicate to us that Chinese people want to move money overseas.
· Upside risks: Stimulus works to boost prices and therefore create a new buying spree. This has happened before. Often.
· Downside risks: Riots, social unrest
That is straight out of the MB playbook. For the full poddy you can dial in exclusively:
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