China’s Economy Heads Toward Stormier Waters
Which needs to be paired with its reduced capital inflows problem.
More after the break.
I have noted this problem before, and the counter problem of highly reduced capital inflows. Both are a serious problem, but it is the reduced inflows which are driving the increasing outflows. The reduction in funds flowing into China has triggered serious concerns among the Chinese wealthy that there will be an economic hard landing. Here on the West coast many cities are seeing a large influx of Chinese buyers. The Vancouver housing market has gone completely crazy with home prices rising to astronomical levels. Seattle, and the San Francisco area are also seeing home prices soar. This is due to highly restive land use regulations and a large number of very wealthy buyers slowly buying up the available properties. The wealthy Chinese are adding to the demand, and there is no willingness to create additional supply.
Until China gets control of this, expect wealthy Chinese to continue buying high quality assets in the US, Canada, Australia, and many other places. This is a flight to capital, because the wealthy Chinese are fearful of holding all of their assets in China.
If the current political crackdown continues expect the pressure for capital flight to increase.
"In the first quarter of this year, there were some signs of life in the Chinese economy even as capital fled, but now, there are very few. May’s numbers show manufacturing taking a turn for the worse amidst overcapacity, automation, and offshoring. More concerning, however, is the slowdown in the services sector, now the biggest piece of the economic pie. The strength of the services sector had been considered evidence of a critical economic transition to a new consumer-based economy. If that transition isn’t happening, China’s problems may be more serious than had been appreciated."
Chinese wage rates have become so high that Chinese manufacturers are becoming uncompetitive. This has created overcapacity, and is what is pushing them to automate. On the other hand, China needs to keep everyone who was employed up through last year employed. The regime has little wiggle room if large scale unemployment takes hold in China. This would likely touch off a serious anti-government lash back.
"China’s economy still has a lot going for it in the long run, but in the immediate term, things look rough. A Federal Reserve interest rate hike is reportedly on the horizon (although poor U.S. jobs numbers may delay it), and if it comes soon, it would coincide with a cyclical mid-year lull in mainland credit availability. Hong Kong’s financial sector is already finding itself in its worst shape since 2008. The bite of a capital crunch on an economy that has long benefited from large private investments will cause even more hurt and give remaining investors even more reason to get out. With rumors of a political feud between President Xi Jinping and Prime Minister Li Keying giving further grist to the idea that political calculations rather than economic calculations are driving reforms, there’s a real risk that the volatile yuan will jerk China and its leadership around with it."
I am not positive on China's long term future, and I am not sure why Mead is. I agree that in the short and intermediate term China's future looks very rough. Making this worse is the fact that capital outflows sapped 1/4 of China's foreign currency reserves in the last year alone. China is down to about $3 trillion today. I fully expect the wealthy Chinese to continue to find ways to move money out of the country. I expect China's foreign currency reserves to be about $2.5 trillion by year end. This could be exacerbated by slowing capital inflows.
China triggered a boom over the past 7 years or so by taking hypothecated assets and borrowing against them. They have also been re-hypothecating these assets. This would be like you or I mortgaging our home in exchange for a loan, and then the bank re-hypothecating the mortgage to a third party on a new loan to the bank. If there are not controls the mortgage could be re-hypothecated many times for more loans. This means the underlying home with a mortgage value of perhaps $100,000 could be hypothecated and re-hypothecated many times for loans of many hundreds of thousands of dollars. This is fine until the economy founders, and the loans are called. Then there is not enough money to repay all of the loans, and the system collapses.
This is but one small aspect of the China Ponzi I have written about before.
What will the Chinese collapse look like?
I was wandering through the city of the future the other day and I noticed . . .
China will not become this century's Superpower, nor will the Renminbi become the world's reserve currency . . .
Friedman is a smart cookie, if he thinks China is entering an existentially difficult phase, he is likely correct.
Then there is the problem with China's demographics, which are apocalyptic. I suspect that China has peaked, although the CCP has been pretty adept at finding new ways to keep the Ponzi going. Once it stops, it will be a doozy!
I am forecasting a hard Chinese landing, and sooner rather than later.