THE GREAT STALL OF CHINA


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Despite its slowing GDP of 6 percent in the third quarter, the lowest in 27 years (which is still sizeable compared to the 2 percent of the GDP’s of the U.S. and Europe), China is set to be the year’s best performing stock market.

It should be noted that major manufacturers in China are diverting funds into financial products rather than putting money back into their companies. Thus, core business investments fell 2.5 percent in the first three quarters 2019.

Instead, they increased their investments in the finance sector by almost a third in the first ten months this year, to $353 billion. 

Facing falling returns from their core business, these financial products offer yields of about 4 percent compared to the textile industry, for example, with returns on assets of only 2.3 percent last year.

According to the Financial Times, “The wealth management products, which include bonds, stocks, instruments based on market indices and private equity and hedge funds, are being sold by banks and brokerages as well as shadow banking entities ranging from trust companies to private investment firms.”

Fangbang Electronics, for example, said it would spend about 93 percent of the money it raised in its initial public offerings on wealth management products, with maturities of at least 12 months.

China’s CSI 300 was the worst performing stock market in 2018, when fell 25 percent. Today, they’re riding the bull market, beating U.S. equities that are up 23 percent this year.

TRENDPOST: This upward trend was derailed on Monday as tensions in Hong Kong intensified. The Shanghai composite closed down 1.83 percent, and the Shenzhen composite dropped 2.26. 

Overall on the Chinse economy and growth prospects, it should be noted that most of these financial products are being purchased from shadow banks. Shadow banking accounts for 45 percent of total lending in the whole economy in the second quarter, the highest since 2013.

TREND FORECAST: While President Trump and the mainstream business news criticize China for purposefully devaluing its yuan so it can export more products, according to the Chinese, they intend to stabilize and/or strengthen it.

The lower the yuan goes, the more expensive debt held in dollars gets. According to the Institute of International Finance, debt held by Chinese firms is over $1.5 trillion, 20 percent higher than it was in 2015.

As evidenced, they are hesitant to lower interest rates and pump cheap money into their economy. For example, China just cut interest rates for the first time since 2016 in its one-year medium lending facility (MLF) loans by only 5 basis points. 

Overall, banks and other financial institutions are now more exposed to a lower yuan currency risk because of their increased borrowing in dollars.

China is closely watching their rural and smaller banks, which have accumulated risky debt over the years. The former chairman of the Henan Yichuan Rural Commercial Bank is now under investigation, causing depositors to hastily withdraw their funds. 

Therefore, while Beijing is forestalling monetary policy and promoting fiscal stimulus, such as infrastructure spending, which grew 3.4 percent year-on-year, it is unlikely to generate significant GDP growth.

Local governments are heavily burdened with huge debt loads taken on from previous rounds of stimulus. “Cities and provinces are having trouble financing new projects, as they must spend the significant portion of their cash paying off debt,” noted a former central bank official.

Back to the Real World 

Inflation continues to be a negative trend affecting the Chinese people. 

Their Consumer Price Index (CPI) jumped 3.8 percent in October from one year ago, China’s highest level in almost 8 years.

China, the world’s largest pork consumer, saw pork prices skyrocket 170 percent since the outbreak of the swine flu. The price of chicken has increased 40 percent.

In addition to inflation, home prices in 70 cities in China climbed 4.6 percent in September compared with a year earlier, which was still lower than 5.3 percent in August from a year earlier. 

The average house price increased by 250 percent between 2000 and 2010. 

Approximately 17 percent of urban family households are living with “housing difficulty” – defined as less than 13 square meters of living space per person – according to the latest 2010 census. Because housing is so unaffordable in cities, poor families live in slum-like communities with makeshift dwellings, such as bomb shelters, shipping containers, and flimsy constructions on rooftops.

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