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Seven Days in China
Taking the pulse of the world’s most exciting economy
August 21, 2018
CER's cheeky recap of the weekly news
Faced with various problems domestically and externally, the decision in Beijing seems to be to just pile on the debt. After a year of relatively determined efforts to rein in this debt monster, it was announced this week that the Center had ordered local governments to issue more bonds to spend more money on infrastructure and other projects - that is, papering over the cracks with more spending. For years people have been saying that this is unsustainable, and at some point it will be. China’s special characteristic is that the vast majority of the debt involves loans between various parts of the party-state octopus - the money is funelled through the state banks and most of it goes to local governments and state-owned enterprises, so there is not the commercial imperative to pay it back and clean it up that there is in a normal economy. But there is a still a point at which things get wobbly, presumably. The P2P problem has been smothered by state finance institutions, and the RMB is being held above the magic 7. Shanghai stocks, however, had a bad week, and the US-China trade spat appears likely to deepen. Meanwhile, another Chinese delegation will soon be heading for Washington to try to resolve the problems. Good luck on that. The US is distracted by the impending mid-term elections and endless Trumpian nonsense, but the threats that Beijing has issued don’t appear to have scared anyone in the US administration into considering a course change. All in all, not a pleasant time for Those in Command.
Another week of escalating trade war, and further signs that China needs the West more than the West needs China. Wobbly currency and stock trends continued, and the "National Team," for sure, has been burning money to keep numbers in psychologically acceptable territory. The RMB ended the week at around 6.85 to the USD, it says here, and the consensus is that they have to keep it above 7 to maintain a sense of calm among the Chinese investment masses. The economy really is beginning to feel the effects of various trends, of which the US-China trade standoff is only one, and there were reports that Those in Command are reconsidering the Belt-Road cash splurge. Auto sales were also down in July for the second month running. Property is the core indicator to watch in terms of whither the Chinese economy, but autos is number two. There were various things this week flying around the walled internet space that is WeChat that we saw which related to middle-class discomfort with overall developments. And that remains the key issue to watch if the economy really does move onto the down-ramp. But twinned with that was a fascinating incident relating to the crisis-riddled P2P industry - online investment players who took the money and ran, leaving many ordinary people in the lurch. Apparently 10,000 victims of this P2P situation planned to converge on Beijing to call for redress, but they were headed off at the pass by the people’s public security bureau. Travelers with an agenda were removed from trains on their way to the capital. How did they know who to watch for? WeChat. So does the monopoly on interpersonal communication enjoyed by the authorities, by WeChat, mean there is no way for such an event to be organized in the future? And how does that play out in the event of an off-ramp economic experience at some point in that possibly dystopian future? Word of mouth? What interesting times.
It’s one of our favorite pop tunes, and we don’t think Sting was mulling the Chinese economy when he wrote it, the word resonates in terms of this week. The stock market plummeted more than 3% on Thursday before being somewhat resuscitated by the National Team, and it fell another percentage point today. Rumors continue to swirl about doings at the top, but we are not yet ready to declare a return of factional politics to the relatively public stage. The backdrop to that and to the stocks is economic data that is not great and indicates slowdown, exacerbated trade problems, further reports of financial option less in the provinces, Chinese companies trying to list elsewhere running into unexpected investor negativity ... and a typhoon to top it off. The statements from the Center indicate they yet again faced with a choice between reform and growth, and they have no choice to go for growth. The state banks will lend more to the SOEs, and maybe even a bit to the SMEs too. And the markets will like that, for now. But it just makes the underlying problems worse. It’s an old theme, an old China story, but there it is. For all those born beneath an angry star, Lest we forget how fragile we are.
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