What will happen to the economy of China in 2024?

We can start our look at the Chinese economy with some good news.

Elon Musk’s Tesla has been knocked off the top spot as the world’s best-selling electric-vehicle maker for the first time by BYD after recording fewer deliveries than its Chinese rival in the past quarter. The US group handed over 484,000 cars in the fourth quarter, more than the 473,000 anticipated by analysts but not enough to hold on to its title after BYD reported record sales of battery-only vehicles of 526,000 for the same period. ( Financial Times)

This is a feature of Chinese economic policy where they look to dominate a market and there is another feature on its way.

Danni Hewson, head of financial analysis at AJ Bell, said BYD’s electric cars were “becoming increasingly visible on European roads thanks to keen pricing”. ( Financial Times)

This is the cutting of prices to achieve export success, at least until other producers have been driven out of the market.

If we look wider we see that unlike its western peers Chinese manufacturing picked up at the end of 2023 according to the Caixin PMI.

The latest PMI® data pointed to a sustained improvement in manufacturing conditions in China at the end of 2023. Firms signalled stronger increases in output and new orders amid reports of firmer market demand. At the same time, new export business fell at the softest rate in six months.

I am sure the cheap Russian energy is helping, although the number is marginal.

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI) – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – edged up from 50.7 in November to 50.8 in the final month of 2023.

As I have been writing this there has been some more good news for manufacturing in China.

U.S. automaker Tesla sold 94,139 China-made electric vehicles (EVs) in December, a 68.7% increase from a year earlier, China Passenger Car Association (CPCA) data showed on Wednesday. Deliveries of China-made Model 3 and Model Y vehicles were up 14.2% from November. ( Reuters)

Property Problems

The ying to the yang above has been the ongoing property crisis which we have been looking at for a couple of years or so now. The simplest version of this is like a game of pass the parcel when the music stops. Putting it another way it is when house price rises not only no longer look certain but do not rise fast enough to guarantee quick profits. Along that road the psychology changes as the punters leave the market further applying a brake. We get a sideways look at that from this by George Magnus in the Guardian.

At about a quarter of GDP, housing now faces years of shrinkage as it adjusts to chronic oversupply and lower household formation.

It used to be described as around 30% of GDP. As we entered the new year there were further signs of the slow down.

The slide in China’s home sales accelerated in December, underscoring the challenges to arrest the country’s property slump.
The value of new home sales among the 100 biggest real estate companies fell 34.6% from a year earlier to 451.3 billion yuan ($64 billion), compared with a 29.6% decline< in November, according to preliminary data from China Real Estate Information Corp. on Sunday. ( Bloomberg)

Also we are seeing more and more official efforts to prop up the market.

Policymakers in China are making renewed pledges to promote the construction of affordable housing, in the latest attempt to reverse more than three years of decline for the country’s property market. ( Caixin Global)

Maybe downplaying the size of the issue is one.

Plunging sales and defaults by developers are taking a toll on the world’s second-largest economy, where the real estate sector, along with related industries, accounts for about 14% of GDP. ( Caixin Global)

That was a sharp fall from 25% to 14%! Anyway according to Bloomberg this is also being tried.

In the latest move to revive demand, authorities relaxed home buying curbs in Beijing and Shanghai, two of the country’s biggest housing markets. Officials in the two mega cities cut down payment requirements for some home buyers and also changed the definition of so-called non-luxury homes, effectively allowing more residences to qualify for lower mortgages.

Such moves may generate some buying but it is going to be very difficult for this to replace the rush of buying generated by the fear of missing out on higher prices. Chinese buyers were also willing to overlook shoddy construction to get on the property ladder and I am sure there will be more complaints about this. Also as this from The Economist in December shows that the policy of buying before the property is built can go very wrong.

Gu Lin is one of millions of Chinese people who ploughed their life savings into a property that may never get built…..He made a 70% downpayment on the 20m yuan ($2.8m) flat in March 2020…….But almost two years after the family were meant to get the keys, One Riviera is still a building site.

The next issue in the property crisis is debt. We were reminded of that this morning via this.

Some holders of China Fortune Land Development Co. dollar bonds have received less than a third of the payments due Dec. 31 from a debt restructuring agreement. ( CN Wire)

If you look at the excuse it is at best weak.

The #property developer explained that the company faced difficulties in transferring funds overseas, resulting in incomplete repayment. The company is actively engaging in communication to resolve the issue.  ( CN Wire)

I am sure bond holders would rather have the payment rather than communication. As for new borrowing US interest-rates have risen and that is before we get to the premium that Chinese real estate borrowers would face.

Over half of loans in China Property Bond ETF yield over 20% ( @JackFarley96)

Plus the sure thing investments of the past have led to singed fingers.

>One of China’s largest investment firms, Citic Trust, had a clear pitch to investors when it was aiming to raise $1.7 billion to fund property development in 2020: There is no safer Chinese investment than real estate.

The trust, the investment arm of the state-owned financial conglomerate Citic, called housing “China’s economic ballast” and “an indispensable value investment.” ( New York Times)

How has the “value investment” gone?

Three years later, investors who put their money in the Citic fund have recouped only a small fraction of their investment. Three of the fund’s construction projects are on hold or significantly delayed because of financing problems or poor sales. Sunac has defaulted and is trying to restructure its debt. ( New York Times).

We also need to remember that Chinese local government’s took on a lot of debt to help juice the property boom.

Comment

The manufacturing situation and in particular EV cars is one which can give the Chinese economy a tactical boost. But to my mind their is a strategic problem which goes back even before I started writing here. One of the world issues pre credit crunch was the Chinese export surplus. That has persisted and now we see China trying to solve its domestic problem by producing and exporting even more. Will the rest of the world let it? The US situation may get harsher depending on the next President and whilst Europe has been apparently happy to deindustrialise via its energy policy it does claim a future of “green jobs” which must in the end clash with China.

The property crisis is hard to change and let me add in another factor which is real interest-rates. We are told that consumer inflation is -0.5% and the official interest-rate for the sector is 3.45% ( loan prime rate). So the real interest-rate is literally 4% and even if inflation rises we are looking at around 3% which will apply a brake to the property sector. When prices are rising quickly this can be ignored but is a factor when they are static. Will they cut interest-rates or wait for the West to do so first?

The UK government spends rather a lot for its austere claims

As we approach the end of the calendar year it is time to be a little more reflective. If one does that with this morning’s release on the UK Public Finances it is hard to avoid the view that the present government is somewhat spendthrift.

Borrowing in the financial year-to-November 2023 was £116.4 billion, £24.4 billion more than in the same eight-month period last year and the second highest financial year-to-November borrowing on record.

Another way of putting it is that it is fiscally expansionary which contrasts with the way that the word austerity is often bandied around as a description of it. One can argue that inflation is a factor here via its impact on cost of living payments and inflation linking. But that is a little awkward for the Prime Minister as the inflation fires were lit by perhaps the most expansionary UK fiscal policy ever via one Chancellor Sunak. Perhaps the Prime Minister could have a word with him.

November Borrowing

That general theme continues as I look at these numbers.

In November 2023, the public sector spent more than it received in taxes and other income, requiring it to borrow £14.3 billion. This was £0.9 billion less than was borrowed in November 2022 and is the fourth highest November borrowing since monthly records began in 1993, behind those of the 2020 coronavirus (COVID-19) pandemic period, the energy support schemes period of 2022, and in 2010 following the global financial crisis.

We are now supposed to be fully recovered from Covid in economic terms as we spent enough to achieve that. But we still seem to be borrowing a substantial sum. If we look back a year this was a government that was presented by the establishment as having what they considered to be sensible policies  as in getting borrowing back under control. Whereas we now know they in theory tightened policy but we are still borrowing large sums. This November might be considered to be a month where we would borrow less than last year due to the cost of the energy support schemes, but the reality is that we have borrowed very little less.

If you look at the total expenditure it does not look too bad and you might return to some sort of austerity theme.

In November 2023, central government’s total expenditure was £87.6 billion, £0.7 billion more than in November 2022 and the highest November total since monthly records began in 1993.

But the end of the energy support schemes changes that.

Subsidies paid by central government were £2.2 billion in November 2023, £3.1 billion less than in November 2022. This is largely because of the cost of the Energy Price Guarantee (for households) and Energy Bill Relief Scheme (for businesses) affecting this month last year.

There was another bit of that in the other category.

Payments recorded under central government “other current grants” were £1.7 billion in November 2023, £2.0 billion less than in November 2022, largely because of the cost of last year’s Energy Bills Support Scheme.

So a change of the order of £5 billion.

On the other side of the coin Receipts were higher.

Central government’s receipts were £77.6 billion, £3.6 billion more than in November 2022 and the highest November since monthly records began in 1993.

You may have spotted that these numbers should have led to a bigger fall in November borrowing. But there are other factors in there such as the Bank of England adding an extra £1.3 billion to the borrowing this year. That is another addition to the debit side on all its QE bond buying on which it so rarely gets challenged. I will return to that later as with the recent declines in bond yields its 2023 sales of bonds look awful. Or if you prefer it has added selling at the bottom to buying at the top.

Debt Interest

We can cover a lot of ground with this one and we can start with November.

In November 2023, the interest payable on central government debt was £7.7 billion, £0.1 billion more than in November 2022 and the highest November total since monthly records began in April 1997.

This became more of a factor as two influences came into play. First was the rise in inflation and specifically RPI inflation which pushed the expenditure on paying interest on them ( around a fifth of our debt higher). Then came the rises in bond yields which pushed the interest payments on the rest of our debt higher. As you can see above things stopped getting worse in November if you will indulge me for £100 million.

Part of the change has been this.

In November 2023, capital uplift was £3.0 billion and was largely determined by the 0.5% increase in the RPI between August and September 2023.

For those unaware most UK index-linkers have a three month lag to the inflation rate and thus changes are on their way. What I mean by that is that we already know the next two months and they were -0.2% and -0.1% so falls will happen soon and we may see more of that ahead. For example the latest energy price estimates for the April Energy Price Cap suggest a fall then.

Next up is the fact that issuing debt for the UK is now a lot cheaper than it was as recently as October. As I type this the benchmark ten-year yield is now 3.55% whereas it peaked at 4.7% in October. So the bond market rally you have been reading about means that going forwards it will be a fair bit cheaper to issue new debt and to refinance existing debt.

Bank of England QE Problems

I said I would return to this and we can look at it via the UK long Gilt future. It bought a lot of bonds in the range 135-140 and it has sold some in the second half of this year in the mid 90s. Actually down to a low of 92. So there are strategic losses here from as I put it earlier buying at the top and selling at the bottom.

Also there is the tactical issue of selling bonds down to an equivalent of 92 and then seeing a ten point rally as we are above 102 as I type this. Yet this so rarely seems to get questioned.

Or if you want the change in the situation put another way.

The borrowing of both of these subsectors is affected by payments totalling £33.2 billion made by central government to the BoE over the last eight months under the Asset Purchase Facility Fund (APF) indemnity agreement. This was £32.4 billion more than the £0.8 billion paid in the same period last year.

Comment

The situation with the UK Public Finances is one which sees quite a few views bandied about. For instance in the over a decade I have been reporting on these numbers there has been a lot of talk of austerity but especially in the more recent period we have seen some extraordinary fiscal deficits. That drum beat seems to be continuing as we have a government which claims to be austere but is in fact fiscally expansionary.

Next up is the issue of the first rule of OBR Club which is that the OBR is always wrong.

In March 2023, the Office for Budget Responsibility (OBR) forecast that borrowing would settle at £152.4 billion in the financial year ending March 2023. In its Economic and fiscal outlook – November 2023, the OBR reduced this estimate by £24.1 billion to £128.3 billion.

As you can see their skill set not only involves getting the present and future wrong as they add the past to it. But on a more fundamental level they predicted a severe recession for this year leading to reports of a “Black Hole” for the Public Finances. Government policy was changed in response to this and it was changed in the wrong direction. In a way we see it from this.

Public sector net debt excluding the Bank of England (BoE) was £2,418.6 billion at the end of November 2023, or around 88.3% of GDP, £252.8 billion (or 9.2 percentage points of GDP) less than the wider measure. This difference is largely a result of the BoE’s quantitative easing activities, including the gilt-purchasing activities of the Asset Purchase Facility (APF) Fund.

Actually in a theme of the times deciding on the national debt is not as clear cut as you might reasonably think but I think the headline of 97.5% is misleading. Probably it is more like 91-92%.

 

The issue of Chinese debt is more nuanced than it may first appear

We seem to have entered a phase where concerns about China related to debt are becoming more of an issue. Let us start with something we have noted regularly which is the way that local government’s have borrowed and of course relates to the property boom.

But there is one more elephant in the room: Borrowings from local government financing vehicles. For years, municipalities have been relying on these off-balance-sheet entities to fund infrastructure and support the local economy. LGFV debt rose to 57 trillion yuan ($8.3 trillion) in 2022, or 48% of China’s gross domestic product, according to estimates from the International Monetary Fund.  ( Bloomberg)

Actually this makes it sound a bit like the Euro area with its off balance sheet vehicles but to be fair to it China has played the game on a larger scale.

It is fiscal maneuvering on an epic scale. LGFV borrowings are almost the same size as official central and local government debt combined.

Bloomberg is rather shy about mentioning the property word but it gets there eventually as it gets to an issue which has concerned us.

To make matters worse, after the property slump, municipalities may not be in a position to help out their LGFVs even if they wanted to. Before Covid, regional authorities got roughly 20% of their income from land sales. Last year, this important revenue stream tumbled 23%.

There are clearly issues here but I am not so sure about this bit.

Call it luck or stellar crisis management. China, one of the world’s most indebted nations, has not experienced a full-blown financial crisis, yet.

On that subject Michael Pettis makes some interesting points. Firstly the Chinese structure is set to avoid that.

A financial crisis is caused by an asset-liability mismatch. China has a largely-closed and highly-administered system banking system, in which regulators can restructure liabilities at will. Under those conditions China was never likely to have a financial crisis.

There is a catch though as we move onto something that is a major theme here. A crisis is also an opportunity to clean things up.

“Too much” debt is a problem because it puts downward pressure on future growth. A financial crisis, while spectacular, is just one of the ways in which it does so. In fact, as Japan showed, avoiding a financial crisis may be more costly economically over the long term.

So now we move from echoes of the Euro area to a fear of Turning Japanese. What you end up with is these.

In your head, in your head
Zombie, zombie, zombie-ie-ie
What’s in your head, in your head?
Zombie, zombie, zombie-ie-ie-ie, oh ( The Cranberries )

Property Prices

From the point of view of the debt holders above there was some good news earlier.

New home prices rose 0.5 per cent on the previous month, according to official data released on Monday, following a 0.3 per cent increase in February. ( Financial Times)

From our point of view I am much less sure, because if prices were too high that is the Western mistake as we chase them ever higher and make them increasingly unaffordable. Also I am not so sure about this bit.

The positive data signalled some relief for China’s ailing property sector, which has suffered a liquidity crisis over the past two years that has plunged a series of developers into default

Whilst the property sector will obviously prefer rises to falls the previous boom relied on expectations being for unabated growth and thus easy pickings. Whereas now we know that the music can stop.

Also the drumbeat of trouble seems to be continuing as I note this from last Thursday.

Sunac China’s stocks should only be worth HK$1 per share, indicating a potential downside of 78%, JPMorgan said in a note. ( @CathyYianZhang )

It had been suspended for around a year and fell 55% on its return.

Belt and Road Initiative

The next issue is something that is as much a matter of foreign policy as economic policy.

China’s $1tn Belt and Road Initiative infrastructure finance programme has been hit by spiralling bad loans, with more than $78bn-worth of borrowing turning sour over the past three years. ( Financial Times )

This makes it sound like China’s property sector although the numbers are at least smaller so far. But the size of the problem is picking up pace.

About $78.5bn of loans from Chinese institutions to roads, railways, ports, airports and other infrastructure around the world were renegotiated or written off between 2020 and the end of March this year, according to figures compiled by New York-based research organisation the Rhodium Group.This is more than four times the $17bn in renegotiations and write-offs recorded by Rhodium in the three years from 2017 to the end of 2019.

These days 78 billion does not seem so much, but one number did catch my eye and this is the scale of the Chinese operation. I knew it covered a lot of countries but not that many.

In addition, Beijing has extended an unprecedented volume of “rescue loans” to prevent sovereign defaults by big borrowers among about 150 countries that have signed up to the BRI.

How much has it done?

The value of such sovereign bailouts amounted to $104bn between 2019 and the end of 2021, according to a study by researchers at AidData, the World Bank, Harvard Kennedy School and Kiel Institute for the World Economy.

A problem for the loans are that times are hard.

Increasing numbers of BRI borrower countries are being pushed to the brink of insolvency by a slowdown in global growth, rising interest rates and record high debt levels in the developing world.

Comment

These matters has contrary strands. If we start with the domestic local government debt we see that it was predicated on a housing boom that no longer exists. It has become the classic establishment game to pump up house prices ( asset prices) to make property borrowing look better as well as telling people there are wealth effects. So I would not be surprised if the Chinese turn up with more tricks on that front. After all us Western Capitalist Imperialists have been at that game for years and indeed decades.

The issue of the Belt and Road Initiative can be looked at in the economic way that the Financial Times has but I think that there is more to that story. In return for the loans China is buying influence and gaining power. The issue we have noted before is it moving into countries with natural resources that China both wants and needs. We have yet to see examples of it taking control of the ports for example that are supposed to have loan clauses that permit that. But again China may be happy to increase influence and play a long-term game. In some places it seems to be working.

Brazil President Luiz Inácio Lula da Silva has urged developing nations to find an alternative currency to the dollar, denouncing the central role of the greenback in global trade.

Thursday’s comments, from a speech made during this week’s state trip to China, lend another voice to growing de-dollarization rhetoric from leaders of BRICS countries — Brazil, Russia, India, China, and South Africa. ( Markets Insider )

If China increases its control over more of the world’s natural resources then it may be quite happy with progress so far. But yet again we see an economic model that relies on debt which means we will need more economic growth to pay it, just as the latter becomes harder to find.

Podcast

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