Category Archives: Research

China’s “Hidden” Stimulus

China’s leaders in Beijing are struggling between the poles of new liquidity injections to stimulate the economy and forceful crackdown on debt. Political scientist Susan Shirk calls this the battle between the “spenders” and the “savers.” The spenders generally are in the State Council and in the provincial and lower level government. They depend on fiscal revenue for growth and career advancement. The savers are allied with the Ministry of Finance, the People’s Bank of China, and the China Banking Regulatory Commission. Their careers rely on preventing inflation and halting asset bubbles.
The current policy is a clear compromise between the two poles. Instead of issuing more government bonds, and increasing explicit government debt, the leadership prefers to use less obvious sources of growth — – what I call a “hidden stimulus. The latest “hidden” stimulus is coming from the banks themselves. They are moving capital from the lending side of the balance sheet to asset purchases called “investments.”. As of the end of October, banking assets stood at roughly 285% of GDP, up from 270% at the end of 2014. But this form of stimulus has less transparency and regulatory oversight, and is forestalling an inevitable collapse in the property bubble.

Thoughts on China from Australia

I just finished a series of meetings with investors in Australia. They are a beleaguered lot. Between the collapsing commodity bubble and rising housing prices much due to Chinese capital many Australians are feeling squeezed. I was asked about capital flight, the property bubble, and whether China is facing a hard landing.

FT – Property Bubble Risks Popping in China’s Southwest

China’s property bubble has sagged in the big cities like Beijing and Shanghai – but it is on the verge of popping completely in the country’s heartland. After spending a week in Sichuan Province, it is clear that land sales, prices and transactions are all declining in double digits.

Is Xi Jinping the Face of a Powerful Beijing?

Centralizing Power in Beijing I find myself disagreeing with much of this article by Bill Overholt (ex investment banking economist now at Harvard) entitled “The Politics of China’s Anti-corruption campaign”. It adheres to the conventional wisdom of centralization of power economically and politically that may be more honored in the breach than in the observance. […]

China’s Rural Property Crisis – A Visit to Sichuan

We visited Chonging and Chengdu in Sichuan Province and also traveled to several smaller cities in the countryside. The property bubble is worse than we thought. Inventories in the Tier 4 and below cities is now at 10 to 20 years of supply and prices have fallen by 30% or more. We think Sichuan is in many ways a typical province and represents much of the country’s property sector. Approximately 60% of property construction activity occurs in these smaller cities. Local governments have been colluding with financial intermediaries to construct excessive amounts of residential and commercial property. With a slowing economy and tightening credit, there is a sense of panic within these governments.

Why the World is Overreacting to China’s Market Downturn

The global markets are blaming China as the instigator for a global slowdown. As the New York Times noted, “The immediate trigger to the outburst of global volatility was China, where the sharp drop in stocks Monday continued a rout that has been underway — with periodic pauses thanks to government interventions — all summer.” We are usually not one to praise Chinese economic sagacity. However, We believe there is a widespread misinterpretation of Chinese policy over the past few months that has created this global crisis in confidence. Apart from a few notable missteps, China has continued to administer its economy with the same tools as before and in some cases has even made modest progress in reform.

Politics of the Renminbi

There clearly is a conflict between different groups over the devaluation of the Renminbi. To get to the punchline: I see this as a progressive and aggressive move by Zhou Xiaochuan at the PBOC. However, I doubt the PBOC was very clear about the impact of the devaluation on the domestic economy or global sentiment. The pushback was much larger than they had anticipated. Still, it was a classic Chinese policy: internationalization as a tool to handle domestic problems. This was true with the WTO entry under Zhu Rongji, which led to reform of the state owned firms. Zhou Xiaochuan is among the most cosmopolitan of senior policy makers (USA PhD) and this is his style.

Steel Outlook and the Macro Economy

We conducted a survey of ten stainless steel distributors in China. Steel is a leading indicator of housing and construction as half of all steel is consumed by these two sectors. The survey was completed just as the Chinese equity market fell. Our survey concludes that demand is declining and producers are beginning a consolidation process. The Greek crisis has added to pressure on excess stockpiles. The housing market is not growing as quickly as the consumption data would suggest. The State Council is encouraging local investment despite efforts to curtail debt.

China’s Bond Swap – How to Price Risk

China’s Rmb 2 trillion bond swap program is designed to lower interest costs for provincial governments by exchanging bank debt for lower cost bonds. Beijing has not clearly defined the debt, leaving much responsibility to provincial governments. This will lead to difficult negotiations among all levels of government and financial institutions.
In addition, given total local debt at Rmb 17 trillion – and probably closer to Rmb 24 trillion – the current program will need to be radically expanded. The initial Rmb 2 trillion program only covers bank loans. But these cover just 20% of the total estimated Rmb 10 trillion. In addition, there is additional debt from Trusts and other institutions. As a result, the state banks could be responsible for up to Rmb 16 trillion of debt. Assuming default rates of 50%, we estimate in the worst-case scenario this could cause a 70% decline in combined bank equity and profits.