The top news of the week was Mr. Xi’s meeting with a slew of American businessmen, including Apple’s Tim Cook. From the reports, it appears the conversation was largely a reiteration of the basic talking points—reforms are continuing, the island is a red line, nuclear weapons should never be used, investors are welcome. But while there were no obvious new elements, the simple fact that he met with these capitalists from America was optically significant. Considered in light of various other changes and announcements, such as relaxation of tourist visas, it may add up to something. It is not clear exactly what, however, and it also could be just superficial atmospherics. It is for investors both domestic and foreign to decide. But for anyone with a stake in this trying to figure out what is happening and how the leadership is planning to address the clearly serious state of the economy with lying flat apparently increasingly being the norm, it is worth pondering.  

Meanwhile the property market continues to be deeply depressed and depressing. Shimao is having trouble restructuring its massive external debts and Vanke this week announced “net income attributable to shareholders” down 46%. This compared to an estimate from analysts ahead of the announcement of a fall of 14%. Everbright Bank also missed its expected profit due to the dire state of property. Vox pop conversations also reflect a deep and continuing pessimism. “Maybe things will improve next year?” is a common theme. But it would appear the plan currently is to muddle through. And a number of the structural changes many consider essential are clearly too difficult to seriously consider.

Meanwhile the sun is shining and summer is coming, so that’s good at least.

Have a relaxing weekend.

The National People’s Congress, the annual event at which Those in Command have the opportunity to share some of the problems and successes they face with the nation and the world, ended this week in an uncharacteristically quiet way, without the traditional news conference by the Premier. It was definitely more of a whimper than a bang. The most interesting part of the whole 10-day affair was conversations between some of the provinces who are particularly hard up financially , and the state banks. It seems as if the Center is trying to avoid splurging money out to the poor provinces, for fear of inflation and waste, presumably in favor of passing on the problem to the state banks. But the question is whether or not the state banks will be willing to take on the responsibility, especially now that the provinces’ primary means of raising funds over the past 20 years, land sales, has largely dried up because of the dire state of the property market. And so there are only two possibilities for them. Either the Center in one way or another bails them out, or else they will be forced to cut services which will have an inevitable impact on the lives of ordinary people and increase unemployment.

The extent of the problem was highlighted in a fascinating graph published this week by the Financial Times, based on information from the 21st century China Center at UC San Diego, clearly an organization to watch. The graph showed “monthly debt servicing as a % of provincial revenue” and compared the percentage from 2017 and 2022. The gap is shocking. Tianjin, for instance, was 40% in 2017, and 200% in 2022. Jilin Province went from less than 20% to more than 180%. Six provinces and two “cities”—Tianjin and Chongqing—were reported to have monthly debt servicing at more than 100% of their revenues. This is clearly not sustainable, even in the context of a system which is so good at smoothing out problems to make them gradually disappear.

Things remain gloomy on the property front as well. First there was Evergrande, then there was Country Garden (which defaulted on a yuan bond this week). But now another major property developer, Vanke, has come under the spotlight with concerns about its viability. This is going to be a difficult year, with black swans and grey rhinos constantly springing up unexpectedly, but in the meantime: have a great weekend!

This was the week of the start of the annual National People’s Congress, the moment when the system faces the world and the nation, and provides an update on developments. The Premier’s opening speech is always an important marker on the state of play, and on how the system wishes to characterize the situation. But this year, even before that speech, there was a surprising announcement, that the news conference which for 30 years has always marked the conclusion of the NPC, where the Premier, number two in the hierarchy, takes questions from the media, has been been cancelled. And not only for this year, but for the foreseeable future as well. A lot of time has been spent over these past few days on analyzing just what this means, how to interpret it. And here we will simply say that we consider transparency to be a good thing.

In his opening speech, Mr. Lee said that the goal for the year in economic development is around 5% growth. Five is the accepted number, but what the word “around” means, is not clear. The markets, prior to the NPC, were looking for a clear message of support for economic development, substantial measures to deal with the problems the system is facing, and a path to the future that is bright in terms of private enterprise and investment. So far, that message has been muted. But on the other hand, the phrasing on the island has been restrained.

The meetings continue through next week. So we will see what further messages are transmitted, and not leap to any conclusions until the event is concluded. But Bloomberg had a hint that the state banks are going to be made responsible for clearing up the LGFV debt mess. Not great news for holders of ICBC shares.

Anyway, have a fantastic weekend!

Just exactly what the Shanghai stock market index reflects is not entirely clear, but it is certainly not an equivalent of the Dow Jones index in New York, and the extent to which that is reflective of the state of the US economy. This is a very different market. The way in which it operates, the motivations of investors, the nature of the key players, the impact of government policy—all these are different. And the result? Over the past 20 years, the Dow has gone gangbusters, and the Shanghai stock index has basically gone up and down but remained pretty much in the same place. Why? Transparency and rules-based structure, perhaps? The same is true of the Hong Kong stock exchange, which used to be international and trended roughly in line with other global markets, but now trends generally in relation to the China financial system.

But the Shanghai stock index has a psychological impact, and is one of the numbers that are watched, just like the exchange rate for the RMB and the reported GDP number, as having a significance in terms of the perspective of investors, and as an indicator as to the overall state of the economy. We are heading towards the NPC next month, the Liang Hui, and Those in Command seem to have decided that the stock market index number during that must start with a 3. The Shanghai Stock index has been falling for a year or so, from 3300 last March to around 2700 a month ago. But then a concerted effort by what is known as the National Team, that is basically state financial institutions, who invest in stocks in order to push up the index, has pushed it back over the past a few weeks to more than 3000. But it is a tussle because there is significant selling pressure due to the fact that many people are feeling uncomfortable about the overall state of China’s economy. So every time the National Team pushes the share prices up, there is selling into that which brings the index back down again. It is a roller coaster ride around a certain number and that certain number is 3000.

There has been a significant retreat of foreign money from China’s capital markets over the past six months and more, and there are other domestic players who seem interested in exiting their holdings in the market. So where will the Shanghai stock index be in three months, six months or one year? How long can the National Team continue to operate in this way? How much money do they have, and how much money wants out? Of course, there are many things that the system can do to offset the desire of private investors and foreign investors to exit the market. State insurance companies, and other players are being authorized to set up equity funds, and that’s fine, except that it means that, as with the housing market, the overall ownership by the state or by proxies of the state, grows and grows.

So with this battle taking place on the stock market as to what the closing number will be every day, how are things on the ground? The answer is that with some exceptions, not good. One driver we asked how their business was going, replied: “It’s an economic crisis.” Strong words, and superficially, it doesn’t necessarily feel like a crisis, but the overall slow down in economic activity, and the general sense of pessimism about the future are definitely weighing on the market. People are looking for a clearer message with regard to the policy direction that the Center wants to follow. The emphasis over the past year and more has been on national security rather than economic development, and through explicit or implicit means investors and business people have indicated that they would love to go back to the Dengist approach of real encouragement of enterprise. And so the pronouncements of the NPC next month will be analyzed with great care to get a sense of the stance on the economy. The word on the street is that the economy will be the main focus of the NPC, and quite right too. On the other hand, this week saw a new call from the Center to all party branches, urging officials to re-double their efforts at instilling the main ideological line deep into the minds of party members. For officials trying to work out what they should be doing and how they should be addressing the various issues they face at the local level, it must be confusing. One small indicator of just how things are with the economy maybe a report from Guizhou, where a state-owned company has issued bonds to provide financial assistance to an LGFV—a local government financing vehicle, the kind of entity which is central to the massive debt problem facing local governments across China—to which it had no previous business links. Weird.

Have a great weekend as you bate your breath for the Liang Hui.

As we head into the Chinese lunar new year dead zone, the economy is not in good shape. Consumer spending is down, the Shanghai Composite Index is back in 2,700s and the property market shows almost no signs of recovery in spite of a slew of new policies in cities across the country. But in marked contrast to the past, the Center made it clear yet again this week it is not going to splurge money into the system. A Ministry of Finance official told a press conference that fiscal spending will be maintained at a “necessary intensity.” That’s probably fiscally responsible but it also results in, or leads towards, a gradual slow down in the economy. Increasingly we are of the view that the probability is that that is the conscious goal. Lower property prices, a stock market minus fizz, reduced expectations, less export reliance… all this could lead to what Deng in the early 1980s used to refer to as the goal — 小康社会, a “moderately prosperous” society. This isn’t what the middle class signed up for or expected after the explosive growth of the 1990s and 2000s, but… 没办法 (it is what it is) is the mantra that is being encouraged.  

A Hong Kong court ordered the liquidation of the monster property developer Evergrande, and the next question is the extent to which and in what timeframe Those in Command will allow mainland courts to allow this to happen. Whatever the answer, it’s an important milestone in the ongoing property saga which is so fundamental to the Chinese economy. This year will see other developments in this area.

And finally, China’s reported debt-to-GDP ratio climbed to a new record high in 2023—287.8%, 13.5 percentage points up on 2022, according to a report by the National Institution for Finance and Development (NIFD). For comparison, the debt-to-GDP ratio for the US is around 120%.

Have a great weekend.