The top news this week is the ongoing US-China Trade War, and the status is as clear as mud. ZTE has been pulled back from the grave with a change in leadership – a wonderful sleight of hand. Trump’s administration is moving ahead with tariffs on another $200 billion of Chinese imports, and Beijing has vowed to respond but doesn’t have enough imports from the US to cover a straight tit-for-tat. It’s going to get tough for American companies all round in China – American anything probably, including visas. Luckin Coffee – which became a unicorn, a startup valued at over $1 billion, this week – suddenly stands a chance if Starbucks comes under pressure. But is a serious boycott of American products at street level a possibility? We would say unlikely.
The latest economic stats out this week, however, were positive, and the economy appears to be on track for 6.6% GDP growth this year. That will be related to two factors not necessarily directly linked to incipient problems with the underlying system – strong exports and strong consumer demand – and one that is linked – property speculation and all the economic offshoots of the property industry, particularly construction. The RMB is weak, and Those in Command appear to have shifted their resources to support Shanghai stocks this week.
But the market that remains most important is the property market, and there are all sorts of reports of strange decisions at the local level which seem to be related to local governments being desperate to keep sales going. The answer to the problem of local government finances, to wean them off property churn, is a property tax – China today has no such thing. But even if it could be implemented, which is a major question, it is years off. And the market today is shaky enough that it could not take the body blow of the introduction of a property tax. It’s hard to argue against decades of straight-line growth, and calling the turning point is a very dangerous game. But the RMB, stocks and even trade are all sideshows compared to the significance of China’s property market. Our eyes remain peeled.
Have a good weekend.