Has China Just Hit Stall Speed?

The Financial Times reports that the Chinese sovereign wealth fund Huijin will buy shares in the four biggest banks in a move to goose the flagging stock market, which is at its lowest point since early 2009. This is the first time the fund has mad this sort of intervention since the onset of the crisis.

The stock market is arguably even more important in China than in the US. With yields on bank deposits chronically well below inflation (and the spread between the two rates continues to be much worse than we are now experiencing in the US), investors are almost forced into risky assets. Since there is no domestic bond market to speak of, that means, for the most part, stocks or real estate (we have also heard of the stockpiling of commodities, such as base metals).

But the stock market may well be sending an accurate signal that China’s economic model is under duress. We’ve commented repeatedly that there has never been a large economy that has had 50% of its GDP consist of exports and investment. And before you say, “China is an emerging economy, it can absorb a lot of investment” the evidence is against that. The supposedly sclerotic US took $4 to $5 of debt to generate $1 of GDP growth on the eve of the crisis. As of 2009, it was taking $7 of debt to generate $1 of GDP growth. And China has been raising interest rates to dampen domestic inflation.

We linked to a post last night from MacroBusiness we thought were even more troubling on this front but comments suggest most readers did not take notice. It suggested that Chinese real estate has just hit the wall:

The National Day Golden Week is ended in China. Traditionally, the Golden Week (or more broadly, September and October) has been a peak season for real estate sales for China.

No longer.

The increasingly tough purchase restrictions in some cities and credit and monetary tightening have crushed the transaction volumes across the country for the best part of the year, even though prices haven’t moved much lower on the whole. Nonetheless, real estate developers are already feeling the impact of low transaction volume, namely problems with their inventory build up and cash flows as they are unable to sell as many properties as they planned. Developers have probably counted on September and the Golden Week, but the Golden Week has turned sour.

Shanghai, for instance, experienced the worst Gold Week holiday in 6 years. Only 398 units were sold in the primary market for the entire the 7-day long holiday, which is only 20% of the same period of last year (in other words, sales dropped 80% year-on-year) according to cnyes.com. According to Xinhua, one developer in Jinan tried to sell their flats by offering gifts like iPads and other electronic products, but without much success. Beijing has been doing somewhat better according cnyes.com, as 866 units were sold in the first 6 days of Golden Week, only 10% fewer than last year, but 62% lower compared to the first week of September. In Nanjing, one developer even offered a buy one (house) get one (flat) free (BOGOF) according to Xinhua, as that developer has failed to sell those houses since December of last year.

In other news, CREIS data shows that home prices in 100 cities in China fell in September on a month-on-month basis by 0.03%. It does not sound significant, though it is the first month-on-month fall in 13 months. With the on-going weakness in terms of transaction volume and the increasing pressure on developers, more price cutting should be expected in the coming months and quarters.

MacroBusiness points out that retail spending is still up about 6% in real terms year to year, so the debt crisis hasn’t yet hit the real economy. But the flip side is consumer spending is under 40% of GDP in China and higher interest rates will slow and potentially even halt growth in investments, which has been the biggest driver of GDP increases. Finally, recall the pattern in the US and other advanced economies: the financial crisis hit first, the real economy hit followed.

While China, thanks to its command economy, may avoid a full bore financial crisis, it isn’t at all clear how it can sustain the level of growth needed to preserve social stability (generally considered to be 7% to 8%) with the current stresses becoming more acute.

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  1. psychohistorian

    I am a sick sort of old fart that this posting makes laugh.

    The sectors of the world are all like a bunch of about-to-explode tinderbox economies.

    All the leadership keeps kicking their respective cans down the road, doubling down in the process and hoping that some other sector of the world collapses first so they can be blamed for it all.

    Please someone, stop the music.

  2. Darren Kenworthy

    Do we know what kind of exposure U.S. firms have to a Chinese asset bubble collapse?

    Is this an “oops you just lost the Mandate of Heaven, prepare for revolution” moment, or can China contain the social costs?

    What means will they use to contain the social costs, and what implications will such measures will have for the rest of the world?

    What more salient questions could be asked to understand how events might unfold?

    Answers are unnecessary, but appreciated. More questions, even more so.

    1. Heron

      1). It’s difficult to know. US banks have been very bullish about China for a long time now, and it wasn’t until, I think, last year, that the notable short-sellers started getting attention for shorting China. With Hedge funds as opaque as they are, laymen like us can only make vague guesses at what US exposure to China is like, though perhaps economists with experience in banking like Yves might have access to information that would allow for a more educated guess.

      2). I doubt it. People make too much out of the “Mandate of Heaven” concept anyway; the Chinese are, and have long been, immensely practical and secular as a culture, and Chinese citizens aren’t walking around worrying about whether the Sun-King approves of the current government. The term is more akin to how our Founders used the word “Providence” though more bloody-minded; having “The Mandate of Heaven” simply means that you’ve managed to suppress or drive to the margins all other competitors for central power, losing it simply means that you can’t prevent rebellions or defeat invaders. As it stands the CCP controls practically any means in Chinese society for rebelling against the CCP. The reasons that the frequent and often large protests in China get so little coverage is because the CCP can effectively control media access to China, and quickly establishes control over any social organization that might be able to act as a focus for dissent. A weakening Chinese economy won’t change this.

      3) The CCP will likely see greater employment-related protests if the economy weakens, and they will most certainly see some anger from the upper-middle-class managerial class they’ve fostered along the coast if their investments start to go sour. Both, I think, they are prepared for. The military is loyal (too loyal if anything; from my readings the Central Committee is always worrying that their generals along the borders will start attacking their neighbors over small issues out of pure patriotism), the geography is conducive to internal blockades making it difficult for protest groups to unify nationally, and the Managers are all deeply embedded in the CCP system (you have to be to succeed at anything in China), making them susceptible to Party discipline. The CCP’s primary concern going forward will be internal stability, and I doubt that will mean anything negative for its neighbors (outside of an increase in nationalist propaganda).

      4) Just how much of Chinese savings has moved into black-market banking? Who are these black-market bankers, and are they really trust-worthy? How likely is a financial crisis arising from black market banking? How involved in construction and real estate is the People’s Republican Army? How will China’s banks respond to the crisis, particularly in light of their recent attempts to slow down loaning and public spending in the southern provinces? Can the CCP think of a way to encourage greater consumption within China, or alleviate the need for large personal savings that has kept consumption weak and investment high?

      1. Zed

        Wow. I just read two intelligently critical comments in a row…
        Maybe there is reason to hope after all.

      2. Susan the other

        China’s black market banking is probably not what we think. Sterling Seagraves elaborates a little on the inherent, indigenous banking instincts of the Chinese who are so long suffering at the hands of their own robber barons. It’s not like cut-throat loan shark gangs. The Chinese follow their basic instincts about credit and join together to create local informal credit unions. Probably not sinister. And that China is having a national BOGOF sale is total Karma.

        I suspect that the real threat to China is the contradictory position they find themselves in as they try to do “free trade” with capitalist countries. They have such a huge population, all with a few yuan in the bank by now, that to devalue their currency will be major suicide. Things have really gotten out of hand. There should have been sensible controls on capital.

        1. Maju

          P.R. China is a capitalist country. Maybe one of the most capitalist worldwide: it does not even have free public healthcare: it’s like the USA but without even medicare! Just that they sport a red banner and a the word “communist” in their single-party name does not make them anything else (meh, Hitler and Mussolini also pretended to be “socialist” in name). China was lost for the “socialist camp” by the time Nixon so famously visited it more or less. Nowadays of that kind of system only Cuba remains (and is being dismantled as we speak).

        2. MyLessThanPrimeBeef

          It’s like there is no difference between the Nationalists and the Communists…none between the right and the left, except the same old story of the rich lording over the non-rich.

          That sounds so familar. Where have we heard that one before?

          1. Maju

            Anti-communists use the term “communism” in a devalued sense. Originally communism meant direct democracy, with some emphasis in socialist economy, and had its model in the two Paris Communes, in which the people exerted very direct control on the government by means of a true participative democracy. The soviets were originally meant to follow that model but failed because of the party and secret police control.

            In China there was never nothing like that in any case.

            Argentinean economist <a href=http://rolandoastarita.wordpress.com/2011/10/10/china-capitalista/ Rolando Astarita just addressed this issue a few days ago (my translation of most relevant fragments from Spanish):

            … can we consider China a capitalist system nowadays. My answer is yes: that we are before a capitalist system, even if it is a transitional economy (…) the key is that overall the economy is subject to the law of [exchange] value and that capitalist property develops every day more freely.

            The economic reforms implemented by the Communist Party began in December 1978 (Mao had died in 1976) and were extended and consolidated always in the direction of Capitalism

            What in Russia [the Bukharin market-friendly reforms] was suspended by collectivization, in China was continued and extended with measures more and more openly favorable to market and Capitalism. (…) Between 1995 and 2005 the number of state-owned companies decreased from 118,000 to just 50,000, the number of state-employed workers decreased from 145 millions (80% of urban jobs) to 75 millions (30% or urban jobs).

            Naturally, because of the magnitude of the changes performed, there are still many forms of property in China that are half-way between state property and full capitalist property

            This is particularly true of strategic sectors like communications, banking, energy… this controlled state-intervention in the economy is typical of fascist systems and also a method of protectionism against more aggressive and powerful external actors (and finally a way to keep some key economic power in the hands of the party).

  3. CB

    Some years ago, when I had the extra cash for subscriptions, I read an article by a husband and wife who had considerable China expertise, with on the ground experience, of all things. Their point was that the Chinese economic “miracle” all the rage among investors was a very thin veneer and confined to a narrow strip along the coast that was constituted as a sort of foreign industrial zone. In the same spirit, I’m thinking, as the seventeenth century Japanese policies that constrained foreigners. Ever since I read that article, I’ve been very wary of bubbling reports of the Chinese economy. I mean, you can’t uncritically believe corporate reporting in this country, how much more opaque in other countries?

  4. Maju

    IMO, the Chinese crisis was unavoidable: it’s been growing on the backs of US, Japanese and European markets, which are now stumbling. There’s been talk of an inner market but China is too big a country to grant good purchasing power to most and only some sectors do have it, while most of the country is a colony of these affluent classes and regions.

    I’m of the opinion that there are absolute limits to growth (environmental ones) and also relative ones (socio-economical ones, notably the destruction of demand by cutting down salaries and welfare). So IMO China could hardly escape the destiny of the global Capitalist World, of which is part. And if China can’t, so can’t India and Brazil: without demand there is growth for nobody.

    And with demand and growth there is environmental disaster or mostly so. There is no solution within the system: another model must be tried.

  5. DC Native

    Gahhh! I don’t have much time this morning, so I’ll keep it short. But let’s all keep one thing in mind: the Chinese Community Party has TRIED to slow down the housing market. Yes, that is their GOAL! They have implemented policies to prevent the folks who typically purchase apartments and houses from purchasing additional apartments and houses.

    The fact that housing sales are declining doesn’t mean that the Chinese consumer is tapped out (far from it), but that they simply aren’t allowed to invest anymore because the CCP prevents it.

    Plus, the average Chinese person actually OWNS their apartment (or house). They pay for most of it with their down payment and, if a mortgage is required, they manage to pay it off in just a handful of years [anything over a 5-year mortgage would be just odd to a Chinese person].

    What does this mean? WE CAN’T ANALYZE THE US AND CHINESE HOUSING MARKETS IN THE SAME WAY. There are similarities, no doubt, but many of the fundamentals are so much different in China than they were in pre-Housing Collapse America that a direct comparison (using the same sort of variables and indicators) is just pointless.

    1. Heron

      Nope. The CCP has been trying to slow down Real-Estate investment and over building driven by local public lending meant to fluff growth numbers, not real estate purchases. The CCP doesn’t have to worry about slowing down purchases because nobody buys any of these millions of apartments, or millions of square-feet of office space that they’ve been building. You’ve got whole cities filled with skyscrapers in China not just sitting empty, but sitting stripped and bare in their interiors; not just unfurnished but unpainted, unwired, un-walled. The reason they’re trying to put on the breaks is because they’ve got all this floor space that’s producing no rents, and it’s producing no rents because no one is buying it.

      1. DC Native


        You are correct that many of these apartments/houses/properties are vacant, but that doesn’t mean they haven’t been purchased. Most have. That’s why apartment prices are skyrocketing throughout the country: the “investors” are swooping in, purchasing apartments/houses/property, and driving up the prices. Meanwhile, the average college graduate or young, uneducated worker is having an increasingly difficult time finding affordable housing.

        As for the fact that the apartments are bare…well, that’s the Chinese way of selling apartments. It’s not unusual and it’s not a sign that they are “unfinished.” That’s simply how new apartments are sold in China, and it has been that way for decades. My fiance’s parents own a nice, relatively new apartment in downtown Tianjin (one of their six apartments), and that is exactly how they bought the apartment; bare. Again, this is one of those cultural differences that leads Western analysts down the wrong path, e.g., “Look! They’re not even taking the time to finish the apartments! It must be a bubble!!!”

        Another example: my fiance’s aunt is incredible wealthy, a billionaire (in terms of yuan). She purchased a new, large, 8+ bedroom home in a wealthy housing community out in the country just a few years back. My fiance and her family went to the aunt’s house this past week for the Chinese holiday, and out of the entire housing community [note: all 100+ houses in the community were sold], there were just a handful of houses occupied. Maybe three or four. The rest were empty. It was a ghost town. But a fully purchased ghost town.

        So yes, China has issues. There can be no doubt about that. But the issues are (for the most part) not what many Western analysts are declaring, i.e., enormous amounts of apartments are unsold and a decline in China’s housing prices will almost inevitably lead to a major recession (just like what happened in the U.S.). I’m not saying that a dip in housing prices WON’T lead to certain issues and economic problems, but we’re not dealing with interest-only loans, sub-prime, securitization, CDS bets that poor folks will get tossed out of their homes, and 30+ year mortgages. That’s just not part of the equation.


        Personally, I don’t know what their housing market/country is in store for. It’s a land of contradictions. But whoever mentioned that the CCP needs to keep an eye on stability I think came closest to the ultimate explanation for the CCP’s actions. The CCP is full of corruption, there can be no doubt about that. But I think the CCP genuinely fears the general public. Everyone points to Tainanmen as the big landmark in modern Chinese history (and it certainly was, to an extent), but I think the folks in charge of the CCP also look back to the days of Mao.

        Modern China resembles pre-Mao China to a great degree. Yes, the “Communist” Party is still in charge, but Deng Xiaoping sharply veered away from Mao’s insanity and toward a Kuomintang (KMT) style of government. That leaves the today’s CCP elites in much the same position as the KMT elites were in. And if you aren’t familiar with Chinese history, let’s just say that it was absolutely, positively NOT a good thing to be considered an “elite” when Mao took over. It was hell; reeducation camps, public floggings, torture, murder, etc.

        I don’t want to get too far from the point, but I think THIS fear drives many of the CCP’s current policies. Yes, they will enrich themselves and prepare their Visas for their final departure when the next big uprising happens [and believe me, many folks in China expect that to happen in the somewhat near future], but while they’re in charge, they’ll do what they can to stave off that day of reckoning. Because they don’t want their head on a stick in Tiananmen Square!

    2. Maju

      Buying homes is not “investing”: investing is in companies and such: generating real economy and not just speculative savings.

  6. kaan

    DC Native

    Thanks for your insightfull comments
    The amount of ignorance of western media about the realities of many parts of the world is astonishing to say the least

    1. Susan the other

      So I don’t understand why China has a policy that discourages the local economies from selling their ghost towns and ghost research parks (300 ghost research parks?). Discouraging any more building might make some sense, but killing a provincial real estate market doesn’t make a lot of sense.

        1. MyLessThanPrimeBeef

          All it takes is one big gloval Potemkin village.

          The Martians may be impressed, but we know better.

  7. ambrit

    The last comment, about the Chineese need to maintain internal stability is all important. The ‘Authoriries’ needs must focus on keeping the masses quiescent, which requires a mix of carrots and sticks. If ‘Round Eye’ economies get crushed as a byproduct of Chineese internal policies, so what. The ‘Middle Kingdon’ in and of itself is paramount. Don’t look to altruistic Chineese policies to help bail out the West. Thsy have more than enough problems of their own to worry about. Remember Tiananamin Square? The same folks are basically in charge.
    Time of (Global) Troubles anyone?

  8. dirtbagger

    It is obvious to anyone who travels to China on a regular basis that there has been major over investment in housing and infrastructure. Many of the high decision makers in China have profited handsomely on these projects. Local governments require on-going land sales to finance existing and new projects. Will these same decision makers have the disclipline to reign in these excesses? Human behavior seems to indicate otherwise.

    The rise of a large Chinese consumer class is likely a myth. Only a small percentage of Chinese are able to afford anything beyond the necessities. That is why food inflation has been so worrisome to Government officials. At first glance, consumption growth numbers seems high, but factoring in a population of 1.3 billion, the per capita consumption numbers are not that exciting.

    How much stuff can be purchased when a family lives in an 6-8 meter flat. After the stove, dining table, sofa, and beds, not much room for anything else except a few electronics.

  9. Hugh

    The real significance of the Mandate of Heaven is that over 2,000 years of Chinese history, since unification under the Qin, central authority has never been seen as inherently legitimate, only contingently so.

    As for Chinese officials being loyal functionaries of the party and subject to its discipline, the rampant corruption among them rather belies this view.

    All in all I agree with psychohistorian’s initial comment. China is as economically unstable as Europe and the US. They are just unstable in just different ways although the underlying model in each is kleptocracy.

    1. MyLessThanPrimeBeef

      It’s hard to find a Homo Not-So-Sapiens Not-So-Sapiens society that is not economically unstable right now.

      That ought to give one pause for thought.

  10. nickj

    i think comparisons of the economies of the west and china need to refer back to the times of headlong expansion during the western industrial revolution.

  11. MMcC

    I think the second paragraph’s focus on the stock market is somewhat misdirected. Investors certainly are forced into risky assets but their exposure to stocks has been declingin, not growing, over the past two years. Instead, their money (well above Rmb4tr of it – that’s trillion, not billion) has gone into structured products that are typically repackaged debt offerings, often property-derived, structured through trusts. In parallel with the recent Huijin purchases, China has also begun restricting the contents and availability of these structured products.

    When you think about debt, property and banks in China, you have to distinguish between what we might call the white and grey markets. Qualitatively, there are differences between speculative loans and specualtive equity investments in property and other overheated areas of the Chinese economy. Functionally, they do the same thing: pump more money into the sector. You can think of China’s recent moves in supporting bank capital, restricting money supply through banks, raising mortgage qualification thresholds and limiting the structured products as related efforts to separate the white and grey parts of the system. The government is standing behind the white parts but making more strenuous efforts to remind people that the grey parts – whether loans or equity – are not going to receive support.

    Over the course of the next year, I suspect we’ll see more investor money flowing back into the domestic stock market, given any sort of half-hearted trigger. But the money will come, if it comes, largely because the government has driven it out of short-term debt-related investments.

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