The big news of the week was a determined effort by the Center to deal with the continuing slump in China stock prices. The measures taken included, says Bloomberg, an order from the Center to major SOEs to move $280 billion, that’s equivalent to RMB 2 trillion, from their offshore accounts through the Hong Kong Connect into the China stock market. HK Connect is a share purchase mechanism through which international investors can buy and sell China A-shares through the Hong Kong exchange. This raises all sorts of interesting questions and issues, which we will consider in this week’s missive.

For the past two decades, China’s main stock index has with only two brief exceptions, basically gyrated between 2000 and 3000. There was a moment in 2007 and again in 2015 when stocks were well above 5000, but that was followed by precipitous falls back down into the 2000s. US stocks, meanwhile, have gone up solidly. The DJI index average in 2004 was around 10,000 and today it is 38,000. The Shanghai index in 2004 was around 1,500 and today it is 2,900. The extent which a stock market index is reflective of a country’s economy is always a question, but there is strong evidence to suggest that China’s is less connected than most western stock markets. And while the DJI number may not be totally reflective of reality either, but embedded within the 38,000 is the entire digital revolution — Apple, Microsoft, Google etc. The Shanghai market is also certainly more open to influence from non-market forces and the SOEs have long dominated it. A stock market should be as accurate a reflection of the economy as possible, and if it is, there is a stability to stock prices. But if it is true that the Chinese economy is facing significant problems, and that the prospects for the next year and more are not rosy, then using precious forex to support prices at the current level could possibly be a questionable strategy. The stock market is one of those few places where the Center does not have full control — it is where the rubber hits the road, and investors can either buy or they can sell. And limitations on selling simply encourage more of the same.

The next interesting element of the plan is that it is the big SOEs which are being required to cough up the cash to bolster the market. There are estimates based on complicated data tea leaf reading of foreign exchange announcements, particularly by Economist Brian Setzer, which indicate that the SOEs in total have around $2 trillion parked offshore. It is interesting that the Center appears to be using this stock market situation as a way of getting the SOEs to repatriate their money, and also interesting that they are using Hong Kong Connect as a way to do it, providing a boost, however temporary, to the Hong Kong exchange.

Of course, the way the China markets work, it could be that the announcement by the Center of support for the markets will encourage other players, including the millions of daytraders who follow official announcements, to leap in ahead, thereby making the investment in SOE funds possibly less necessary. But this game has been played many times before and this is a shaky market right now, because of the basic lack of confidence in the future which is being exhibited by investors and consumers alike. While the Shanghai market index went up on Thursday, on Friday it drifted up and down around the starting mark. Presumably, because every time there is a jump in pricing, some investors see it as an opportunity to exit in the belief that the longer- or medium-term prospect is not so great.

Overall, the $280 billion can definitely squash a few short sellers, but if the investment is not coupled with economic policies that shift the confidence needle, then it is hard to see how it has any even medium term impact. Premier Li Qiang this week called on officials to “vigorously improve the quality and investment value of listed companies, increase the entry of medium and long-term funds into the market, and enhance the inherent stability of the market,” Xinhua reported. But that is easier said than done. What kind of bold announcement could result in a market sentiment U-turn?

What a good question to ponder in the coming weekend, which we hope all enjoy.

As expected, the GDP growth rate number for 2024 was released, and just as we predicted in last weeks missive, the number given was 5.2%. Now, we are not saying that the process by which this number was arrived at was predictable from a perception calculation perspective, but it does raise our eyebrows that so many media organizations say that China had a GDP growth rate of a certain number without adding the word “reported.”

Another number released this week by the system was a number for youth unemployment, which was given as 14.9% for December. What is most interesting is that the youth unemployment statistic had been released on a regular basis for several years, until it reached 21.3% in June of last year, at which point it was cancelled. There has since been radio silence until the December number was released this week. Now again, we have no information that allows us to contradict this number, but our overall anecdotal atmospheric sense of the state of China’s economy over the second half of 2023 makes it hard to believe that the unemployment number went from 21.3% to 14.9% over those six months.

Yet another number that we espied this week was that, according to a Central Bank advisor, only around 10% of LGFV debt is being channelled into new projects, with the rest being used to repay the principal and interest on existing debt. This is not a healthy situation.

Speaking of numbers, tomorrow is day number six of the week. So enjoy the weekend!

Almost certainly next week we will have the GDP growth rate for 2023 announced by China’s National Bureau of Statistics. The estimate from the International Monetary Funds, reflecting many other estimates by financial and other organizations is that the reported growth rate will be 5.4%. Caixin did a survey of economists at 16 domestic and foreign institutions and averaged their estimates at 5.3%. All were somewhere around five, but not under five. Can’t start the number with a 4. The reported GDP growth rate for 2022 3%.

And then came a report from the Research group Rhodium this week, which said that the actual GDP growth rate is estimated at 1.5%. Here is how Rhodium phrased it: “Despite clear evidence that it was slowed down by unexpected economic headwinds this year, China will almost certainly claim to have hit its “around 5%” GDP growth target for 2023. The realities of a still-shrinking property sector, limited consumer spending, falling trade surplus, and battered local government finances mean that actual growth in 2023 was more like 1.5%.”

For most major economies, GDP growth rate is a number which is calculated with a high degree of transparency, and is considered to be generally reliable. China has the second largest economy in the world, but the process of determining GDP is not transparent at all. Over the years there have been occasions when the GDP growth rate reported by all the provinces of China added up to more than the national GDP growth rate. This is just one small example pointing to the fact that we really have no idea what the true numbers are. And anecdotally, and atmospherically, it seems highly unlikely that China’s economy grew at 5% in 2023. Although, of course, it always depends on what you are including or excluding from the calculation.

What is the value of the number reported by the Chinese government for GDP growth, if there is a reasonable likelihood that the number is more of a political decision than a reflection of economic factors. The answer given generally is that, while the GDP percentage is questionable, the general trend has a value in determining the status and direction of the Chinese economy. That might be true, but if you compound the percentages, and if there is a fundamental flaw at the heart of the numbers, you end up over the years with a significantly skewed estimate on the actual size of the Chinese economy.

So next week we will have a number. We will see who is going to accept it, who is going to question it. We of course have no better number to provide. All we have is a sense of how things went over 2023, with the hope of a post-Covid rebound that never really emerged, and almost no bright spots in the economic landscape except for car exports. The GDP growth number is the top line number that everyone always refers to for any economy and it would be nice if there was no sense of uncertainty about it. Our bet, for what it’s worth, is that the number that will be announced is 5.2%. Whatever that means. In the meantime have a great weekend.

Suddenly we find ourselves in 2024, and it’s a muted beginning with no huge trends or issues shouting for attention. But there are some bellwether issues worthy of consideration.

Data security is a BIG DEAL for the Center and for companies operating globally, and it appears as if the regulations on the transfer by companies of data over the border to elsewhere are being implemented more from the perspective of security than economic development. The Financial Times reported this week that only around 25% of the applications made by companies for the movement of data across the border have been approved so far.

December saw the third biggest monthly outflow of foreign funds from China’s equity markets on record, as investors look to diversify away from the world’s second largest economy. That statement should be a contradiction, but unfortunately, right now it is not.

It was announced that visa-free travel between Thailand and China has been instituted, adding the Southeast Asian country to a list of several European countries, for whose citizens visa-free access to China was announced last month. This is presumably aimed at encouraging tourists and business people to visit China to help invigorate the economy, but it probably won’t feel like an earnest effort at changing the parameters unless a major entity like the United States, or the whole of the EU is included. And that seems, so far, very unlikely.

The Dutch Company, ASML, which produces the machines used to make semiconductors, hit a problem when the Dutch government revoked permission for the sale of some of its machines to a Chinese buyer, ahead of the planned deadline for such trades.

The bottom line to draw from all these points? Probably that decoupling remains a real thing, on both sides.

In these early days of the new year, and before the lunar new year comes into view, remember to stay warm.

Making predictions is always dangerous, because the world and indeed the universe never act in a predictable way. Randomness is a fixed part of the process. But we have to try to take some view on the future, or we’re all going to just stay lying flat, and that is not going to help any of us. So what is the shape of the coming year? We might as well have a go at working out how this is going to go.

We will start with China, because that is of course, our focus. And our prediction would be that the year ahead is going to be a difficult one. It is not going to be one of a sudden crisis, but the problems that beset the system are going to gradually worsen, and there are for sure plenty of black swans and grey rhinos hiding in the bushes, waiting to jump out at us. The nature of the system is such that it can maintain its placid appearance for far longer than systems where there is transparency and accountability. But in the end, and don’t ask us when, there is a consequence and a resolution.

To be more specific, we predict employment is going to become worse, property will not see a significant rebound, it will prove impossible to fundamentally alter the current mentality of investors and consumers who are taking a passive and basically pessimistic view on prospects. It would take a major announcement on a significant issue by those command to shift that basic attitude, and such an event seems very unlikely. They have decided on the path, and they intend to stick to it.

Our guess is that the message Mr. X gave to Mr. Biden, that nothing was planned with regard to the island in the immediate future, will prove to be true, and that there will be no move to “resolve” that issue, regardless of how the forthcoming presidential election over there turns out. But the uncertainty that surrounds the issue is the most basic factor, and it is not possible for them to sweep that away, without abandoning the goal entirely. And that is certainly not quite yet.

In international terms, the prediction would be that the wolf warriors will be kept under tighter control than in the recent past, but the fundamental approach of looking to undermine the western-dominated global systems will continue unabated.

As to the rest of the world, we would predict the conflicts in Gaza and Ukraine will persist, but will not escalate beyond current levels. The Middle East will continue to fester. As to Ukraine, both the determination of Ukrainians and of the West will ensure Russia will not win and will continue to suffer huge losses. A ceasefire seems unlikely. How that one ends is impossible to say, but it still seems unlikely it end with Putin smiling.

As to the US, the main focus will be on the fate of Trump, and our prediction would be that in the end, the wheels of justice will push him into jail. If the GOP actually fields him as their candidate, they are idiots. And they might because they are. Middle America, in our view, is not going to support this man regardless of how old Biden is. The election may turn into a Biden versus Nikki Haley contest, and given the complete moral capitulation of the Republican Party, our money would still be on Biden to win. Possibly with another running mate.

Meanwhile, the US economy is doing okay, Europe is muddling along as usual, and while China is making good use of its relations with Africa and the Middle East, its increasingly difficult relationship with the developed world is not good for its economy. For the United States, if Trump is firmly and clearly rejected at the electoral and legal levels, then there is a chance for some sort of an American revival in the years ahead. The world is becoming more multipolar, no doubt about it, but America is not going to disappear or cease to be the hub.

Overall, we look to the future with hope and some consternation, but the human race has a way of finding the right path through its troubles, and we predict that we will do the same in this extraordinary time.

Have a great year ahead.