We know China’s economy is plagued by an assortment of problems, high unemployment, local government debt, aging population, and declining exports, but it’s impossible for us to quantify them. The same is true with the real estate bubble. It’s hard to know the size.
An online Chinese post, however, summarizes China’s real estate bubble, local government debt and banking crisis in less than 70 words: “After 3 decades of a real estate boom, developers have a debt of 30 trillion yuan collectively; homeowners owe banks 68 trillion yuan in mortgages; local governments have a total debt of over 100 trillion; and China’s four largest banks have a combined debt of 122 trillion. It’s like 4 people playing poker, and they all lost money.
Where did the money go?
After Evergrande’s founder was arrested, one of China’s financially sound private developers, Country Garden, is also now on the brink of collapse. Although Country Garden’s 1.4 trillion yuan debt is significantly less than Evergrande’s 2.4 trillion, it has four times the number of unfinished housing units than Evergrande, primarily in small cities. Country Garden’s demise will affect more families and have a seriously detrimental social impact.
China’s overall economic situation is so bad that the ruling Communist Party doesn’t seem to know what to do. Xi Jinping has recently waved the olive branch again and said that China has 1,000 reasons to maintain good Sino-US relations when meeting with US Senate majority leader Chuck Schumer. However, the CCP’s internal political struggles have prevented any consensus from being reached within the Party to save the economy. And the regime might have just given up.
The Chinese Communist Party’s National Congress holds its Third Plenary Session every five years to discuss strategic economic direction. For example, Deng Xiaoping’s famous economic reforms and opening-up policy were recognized at the Third Plenary Session of the 11th Party Congress in 1978. People have high hopes that the Third Plenary Session of the 20th Party Congress in the fall of 2023 will come up with a strategic direction. But we’re well into October and no news about the session has been heard. We can’t help but wonder what’s taking the leadership so long to that urgently needed meeting.
CCP’s narratives on China’s economy
To the outside world, however, Beijing continues to publish promising economic data against all economic indicators. And the world’s reputable media outlets have repeated the CCP’s narratives. Reuters: “China’s Q3 GDP growth shows economic recovery gaining traction.” Financial Times: “China’s economy grows faster than expected in the third quarter.” The Wall Street Journal: “China stabilizes, in the shadow of Country Garden and Evergrande.”
Moody’s Analytics has raised its 2023 growth projection for China to 5% from 4.9%, citing that September Industrial output grew at a stronger rate than last year, beating analysts’ expectations.
I wonder how many economists really believe China’s economy will grow 5% this year. It’s not realistic even by China’s official data. According to the National Bureau of Statistics, real estate sales in square meters declined 7.1% during the first 8 months of 2023 when compared to 2022, and the sales in revenue declined 3.2%.
From January to September this year, China’s imports and exports fell by a cumulative 6.4% compared to the same period last year, with exports down 5.7% and imports down 7.5%.
Where will China’s growth come from?
If real estate and exports have both contracted, where will China’s growth come from? Domestic consumption? Unlike the United States and other developed countries, the Chinese economy is driven by investments; consumption plays a very small role in the economy.
Just as I was questioning these reports, I found a letter written by a Chinese asset management firm to its customers. The letter has been circulating online, and the pessimistic view of the global economy expressed in the letter is very shocking.
“Different from the regional financial crises of 1997 and 2008, the upcoming great recession will be an all-encompassing and indiscriminate strike on the economy. In such a scenario, financial markets won’t be able to escape…Unfortunately, crossing the trough of this cycle will require institutional and fundamental reforms addressing the heart of the matter, a process that has historically taken at least five to ten years…“
“In summary, there is really no need for conservative investors to stay in the capital markets where the risk of volatility is the greatest…”
The prolonged Russia-Ukraine war, the recent onset of a conflict in the Middle East, and the prospect of war in the Taiwan Strait have created great uncertainties, and the discerning author attributed the problems to humans’ loss of heart.
“To summarize, both domestic and global geopolitical environments are facing unprecedented uncertainties. An epic global recession or even war will break out inevitably in a few years!
Humans are different from animals that fight with each other to the death because we have a “heart” with a conscience. Looking at today’s world, however, people have lost their heart and their animal instinct is on full display…”
The truth of China’s financial market and economy
The letter began trending quickly and the authorities decided to remove it. The removal of the letter validated its authenticity. The company that published the letter issued a statement saying that the view expressed is an individual opinion and doesn’t represent that of the company. But many people including myself feel that the letter spoke with brutal honesty about China’s financial market and economy.
“We solemnly recommend that all investors redeem shares of our funds. This is because the stock market has lost the basis of long-term value investment, and our long-term investment strategy based on corporate fundamentals has failed. Finally, the market is likely to have a small rebound in Q4. We will strive to liquidate all positions in the portfolio, and investors can propose to withdraw based on your own judgment.”
It is certainly hard to believe that a financial services company is asking its customers to liquidate assets, take the money, and run. But in China, if the financial professional still has “heart,” this is probably the only honest and sound advice he can give to clients at the moment.
Close to 1 trillion RMB left the mainland and poured into Hong Kong in August. Hong Kong’s Exchange Fund, or its government’s fiscal reserves, which are used to support the stability of the Hong Kong dollar’s exchange rate, dropped by 35.8 billion Hong Kong dollars (about 4.57 billion USD) in the same month. Some analysts pointed out that this indicates that money is flowing out of China to foreign destinations via Hong Kong and it’s happening on a very large scale. What’s said in the letter isn’t anything new. People who are in the know have already fled.
I admire the author for having the integrity to speak the truth. If it weren’t for him, I might have believed that China’s economy is recovering faster than expected per Western media.
The letter ended by apologizing to the shareholders. “We regret being unable to create extraordinary returns for our investors, and offer our deep apology to those who are still in the red! … We’d like to sincerely thank all the investors for being with us. As the mood of fall is getting heavier, a drifting winter will arrive soon…”
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