It has been 3 years since the world's largest real estate (RE) developer, Evergrande, collapsed. The RE crisis in China has not only not been controlled… but RE values have fallen even deeper — especially in 2024.
Chinese people have probably lost patience waiting for their home values to rise again. This further causes them to tighten their consumer spending belts - thereby businesses also lose motivation to expand production. July was the first month witnessing bank loan balances in China growing negatively — increasing concerns about the possibility of balance sheet recession on corporate balance sheets - “balance sheet recession" (when businesses stop borrowing capital to produce).
The debate: Whether China is following the path of Japan ("Japanification") or Korea ("Koreafication") also seems unconvincing — especially given the recent decisions of the Chinese government.
Viet Hustler's weekend Macro Economics article will return to China — compiling macro economic information and commenting on China's direction in the current period.
The comprehensive crisis continues to prolong in China
Regarding the latest economic data in China, it is easy to see that the “Asian dragon” is continuing to get stuck in persistent crises without end.
1 - Real Estate continues to decline faster and no bottom in sight
Despite bailout measures (for businesses) and stimulus (for consumers) from the Chinese government…
China's Real Estate shows no signs of recovery – even continuing to go down without a bottom!
The streak of declining home sales continues to lengthen and worsen:
Total new home sales from 100 major RE companies have decreased ~ -26.8% y/y in August 2024, much larger than the -19.7% y/y decline in July.
In terms of figures, August sales (~CNY 251 billion ~ USD 35.4 billion) is also the 3rd lowest in history:
Home prices in August also continued to fall deeper than the previous month:
Homebuyers' mortgage demand hits bottom:
China's mortgage outstanding not only fails to grow… but has slightly declined since early 2022.
It can be said that the China RE crisis issue is becoming a vicious cycle: The longer the RE price decline persists… the harder it is to reach the bottom.
Because, prolonged RE price decline (over the past 3 years) causes public confidence to collapse…
… when Chinese people realize that: the immutable Asian belief in long-term home price increases is no longer true.
This delivers a big psychological blow to home buying demand – causing home buying demand to decrease.
The more home buying demand decreases, the more home prices fall … creating a vicious cycle…
And as Viet Hustler noted: China doesn't know how to deal with the current RE problem.
Meanwhile, China is limiting large bailout packages due to fears of corruption issues and moral hazard that the authorities want to curb (Item 3 in this article).
A few measures to improve the RE crisis in China last week
Chongqing (key southwestern Chinese city) announces: applying new incentives (announced on Saturday 08/31) to stimulate home sales.
China is also considering allowing previous homebuyers to renegotiate old mortgage contract terms (renegotiation) with lenders.
RE developer stocks rose - while bank and financial institution stocks fell sharply due to this news.
2- Economic growth stagnates due to declining consumer sentiment
The sense of loss from RE continues to cause Chinese people to tighten spending – China has nearly bogged down in deflation:
China's CPI growth is quite sluggish compared to previous periods: inflation only at +0.5% y/y in July.
July retail data declines -7.3% M/M and quite weak growth compared to last year (+2.7% Y/Y) - Moody Analytics
China's August 2024 Manufacturing PMI data continues in contraction territory 49.1 (lower than expected: 49.5 and previous month 49.4).
Non-manufacturing PMI rose slightly, but for China (a country dominated by export manufacturing), non-manufacturing PMI is less important than manufacturing PMI.
Thus, the composite PMI continues its downward trend since March this year:
Alarming PMI figures for consumption and exports such as:
New orders index at only 48.9 – down -0.4% M/M and the lowest this year.
Overseas demand for Made-in-China goods also weakens as new export orders index continues in contraction (48.7).
Private investment and infrastructure investment activities both decline:
With the above production and consumption data, China may not achieve the 5% growth target set for 2024.
3 - Capital markets operating in contraction due to slowing economy
Stagnant economic activities have caused credit growth in China to stagnate since after Covid:
Businesses limit borrowing for production investment,
Consumers even less willing to borrow for spending-buying homes –
Only the government is aggressively borrowing to fund economic stimulus packages – but not enough to offset the entire economy.
In particular, for the first time in 2 decades, bank loans (main financing channel for SMEs) posted negative growth!
This further raises fears of a balance sheet recession on corporate balance sheets….
… as businesses do not borrow to reinvest in expanding production (causing balance sheets to contract).
What direction for China now?
» "Japanification" vs “Koreafication”: Is investing in high-tech supply chains the solution?
Instead of getting stuck in a lost decade like Japan ("Japanification"), can China learn from Korea (“Koreafication") - focusing on the tech-value chain to boost exports?
FYI: After a hot development phase, late 1990s, Korea also faced slowdown after the Asian financial crisis.
In 1999, Korea enacted a new Industrial Development Act to penetrate the global high-tech goods supply chain…
Thus, Bloomberg believes:
Xi Jinping's focus on new technology sectors and high-tech development (high quality development) as the driving force for the economy (5-Year Economic Conference) is a move similar to Korea in 1999.
In which, China aims to target 3 new pillars - in the hottest tech fields today: electric vehicles (EV), lithium batteries and solar panels.
Read more: China's Two Sessions in March 2024.
However, China is unlikely to become Korea 2.0, because:
Both China and Japan have experienced major financial bubble bursts that caused consumer spending to collapse more unexpectedly than in South Korea.
And the scale of China's economy and population is vastly different from South Korea's.
In particular, China always makes the US and Europe wary – and limits China's development to exactly those 3 aforementioned technology products!
Previously, Europe has almost started Trade War 2.0 with China over electric vehicle products:
The EU raised tariffs on EVs to 48% in June - after a long investigation into the dumping issue of EVs by Chinese companies.
The US Trade Representative's Office (USTR) is also expected to approve tariff increases on the above products from China on Friday (08/30).
FYI: The plan includes 100% tariffs on EVs, 50% on semiconductors and solar panels, 25% on lithium-ion batteries and critical minerals, iron, steel, raw materials, port ship cranes and syringes…
This decision was supposed to be announced from early August but was delayed by USTR to 08/31.
Now, USTR unexpectedly announced a further delay of the decision last weekend.
In fact, China still relies heavily on merchandise exports:
Exports to the US have declined but remain high and are rebounding.
Exports from China to the rest of the world (RoW) have always been maintained at high levels.
The US and Europe's strengthening of trade defenses against the above key technology products will always be a barrier for China to follow South Korea's previous path.
» China's “corridor” control strategy
Another opinion also suggests that China may adopt a strategy corridor control (“corridor” control) at the current time, keeping everything at a “moderate” level.
“Corridor” control may include: Using authority and politics to keep every aspect:
… not too good to explode (so the government can still control)…
… but also not too bad (to avoid public panic).
It can be seen that the “corridor” control strategy has been applied from the technology sector to stocks and finance… in the past period:
Technology: restricting Big Tech development in China … everything is just moderate.
Read more: China and the 32-month big tech crackdown
Financial market:
Strong intervention in the stock market to prevent stocks from falling early this year: to keep the situation not too bad…
including buying ETFs, short-selling bans and high-frequency automated trading algorithms (High-Frequency Trading - HFT)...
Read more: China and the strong move to stabilize the market
Keeping the 10Y benchmark bond yield around 2.1 - 2.2%:
Government and businesses still enjoy lower capital costs than before.
But savings in China still yield enough return (interest rates not near 0% like Japan or EU during deflation) but also lower than before to encourage people to spend…
This approach could transform China's financial market towards “low volatility”:
The strength is not creating surprises and public outrage during the current crisis period.
But the downside is reducing market dynamism and limiting economic agents' activities.
The 'corridor management' strategy is basically a planned economy mindset. -But it means the plans must be good enough and comprehensive enough.
Otherwise, it will lead to a financial market with trading volume declining along with volatility – and an economy lacking dynamism.
However, how can one create a “good and comprehensive” plan for a giant economy like China?
CONCLUSION
It can be seen that the vicious cycle: house prices fall => people lose confidence in real estate => home buying demand decreases => house prices fall further => people lose even more confidence… is causing China's real estate market (once the world's largest by market cap) to sink deeper into recession.
Tensions in China's real estate market have escalated particularly since the beginning of this year — possibly indicating that consumers no longer have patience to believe real estate prices have bottomed. This directly affects people's consumption habits for other products as well: causing domestic consumption demand to decrease - Retail sales MoM growth negative quite severely.
Businesses are also reducing production as a result: Last month was the first with negative bank loan growth — indicating a “balance sheet recession” is very close. When businesses reduce borrowing - reduce balance sheet size - that's also when they cut production!
While China does not roll out too many large consumer stimulus packages or aggressive rate cuts like Japan, it wants to boost the economy via technology development. This raises suspicions it might choose South Korea's path! However, China is perhaps not opting for “Japanification” or “Koreafication”, but the “corridor” control (“corridor” management) strategy to keep everything moderate… Perhaps waiting for a surprise “black swan event” to turn things around. For example, real estate bottoming and rebounding! But the question is whether such an event will happen?
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