The last week or so has seen some troubling economic news out of China. We can start with something that will send a chill down the spine of any central banker.
Hong Kong (CNN)Chinese authorities on Sunday violently dispersed a peaceful protest by hundreds of depositors, who sought in vain to demand their life savings back from banks that have run into a deepening cash crisis.
Since April, four rural banks in China’s central Henan province have frozen millions of dollars worth of deposits, threatening the livelihoods of hundreds of thousands of customers in an economy already battered by draconian Covid lockdowns.
The usual response of a central bank in such a situation is for it to guarantee that depositors will get their money back and I recall the Bank of England promising this at the peak of the Northern Rock crisis. Yet the People’s Bank of China is letting this grind on.
The investor Kyle Bass has added this.
Bank runs are happening all over China. It’s important to note that the Chinese banking system represents 350% of Chinese GDP (on balance sheet) while the U.S. system is only 100%. One of the largest lending categories of Chinese banks is real estate…Chinese property Developers are filing bankruptcies at a record pace. Moody’s has DOWNGRADED 91 Chinese property developers this year alone…while Moody’s had only downgraded 54 OVER THE PAST DECADE before this year’s actions. China’s banks are insolvent.
I do not know if he is right about the scale of the banking problem but we do know there is one as the South China Morning Post highlighted at this beginning of this month.
After more than a decade of freewheeling growth riding the winds of government stimulus, China’s small banks have become a financial burden for local authorities and the target of a national anti-corruption campaign.
The situation is especially severe in less developed regions, like Liaoning province, where the coronavirus pandemic and subsequent virus controls have taken a huge toll on regional finances and exposed scores of bad loans in the process.
The Property Crisis
This is something we have looked at quite a few times and it even arrived close to me when there were problems for the Chinese funded development in Nine Elms near Vauxhall. The issue looks to be ongoing.
HONG KONG, July 10 (Reuters) – Chinese property developer Ronshine China Holdings Ltd (3301.HK) has not made interest payments on its June 2023 and December 2023 notes, totalling $27.9 million, in the latest blow to China’s embattled property market.
Last week there was this as well.
HONG KONG, July 3 (Reuters) – Chinese property developer Shimao Group (0813.HK) has missed the interest and principal payment of a $1 billion offshore bond due on Sunday, in the latest blow to China’s embattled property market.
This from Asiaone looks rather desperate.
Amid a months-long slump and with local governments not allowing large price cuts, a developer in Nanjing in June invited buyers to sell it up to 5,000kg of watermelons to offset 100,000 yuan (S$21,000) of the price of a new flat.
A developer in Henan province accepted about 430,000kg of garlic from buyers over 16 days in late May and early June, helping it sell 30 homes. In Wuxi, in Jiangsu province, homebuyers could provide peaches to offset up to 188,888 yuan per unit.
This provides a different picture to the official indices where there was a minor monthly fall of 0.1% in the latest release. It seems that there are substantial falls on the price of homes in new developments. It also begs another question as what does an ordinary person do with 5,000 kilos of watermelons?
The price controls have switched this from a currency transaction to one partially financed by barter.
Local Government
This is another area that got caught up in the Chinese property boom.
“Across China, a growing financial burden on local governments is pushing many to gamble with dangerous debt products aimed at retail investors, which are reigniting concerns about financial risk that Beijing has been at pains to keep under control.” ( South China Morning Post)
Michael Pettis explains how this will cause yet more trouble.
This is a systemic problem. Local governments have seen revenues collapse and expenses rise, and are also tasked with creating enough economic activity to meet growth targets well above what the economy can sustainably deliver. The only way they can manage these conflicting conditions and policies is by allowing debt to surge. If there were still enough productive infrastructure projects into which they could invest to meet growth targets, this wouldn’t be a problem.
But as he goes onto say there is not enough growth and has not been for a decade or so which means we have seen the Chinese version of kicking that poor battered can.
The problem, as anyone with emerging markets debt experience can tell you, is that these risky debt products create highly inverted balance sheets that only exacerbate external conditions. Making things “better” today means making them worse tomorrow.
China Inflation
I thought that I would note a rather curious development here.
In May 2022, the national Consumer Price Index (CPI) rose by 2.1 percent year-on-year……..In May, the national consumer price fell by 0.2 percent month on month. Among them, the prices in urban and rural area decreased by 0.2 and 0.1 percent; food prices dropped by 1.3 percent and nonfood prices rose by 0.1 percent; and consumer goods prices fell by 0.3 percent and service prices were flat.
There is no mention of energy prices which looks extraordinary and if you look into the detail I note we are told that domestic energy has increased by 4.1% over the past year and that vehicle fuel is up by 27.1%. The former seems a bit hard to believe when the producer price release tells us this.
Among the purchaser prices of industrial products, the prices of fuel and power increased by 31.6 percent.
For example we know that China uses quite a bit of coal and we know the price has been rising as shown by this from overnight.
New price record for thermal coal. Thermal coal futures in Newcastle set a new record at $413. ( Spriteer on Twitter )
Comment
We are approaching the moment that the latest GDP figures for China will be released but the truth is that they are so massaged they obscure as much as they reveal. So I think that we learn more from this announcement.
a July 7 Bloomberg News report said Beijing was considering a plan to allow local governments to sell 1.5 trillion yuan ($220 billion) of special bonds in the second half of this year. If the new bonds are issued, they will take available funding to levels similar to the stimulus that helped drive the recovery from the initial COVID-19 outbreak in 2020. This is a time-honoured strategy of lifting infrastructure and construction spending to boost the economy. ( Reuters)
I think that the plan for yet another stimulus tells us the true state of the economy and in particular the property sector that has been so troubled.
Finally there is the issue of the Yuan which has fallen by less than many other currencies versus the US Dollar at around 6% in this phase. Are they trying to protect the US Dollar debt?