Letter From Shanghai No 1106 - It’s no collapse, but it’s no party either

As time passes, the markets are realising that Beijing plans to do not much at all about the current slowdown in the Chinese economy. Of course, as this is China, the fact that there would be no bazooka had been signalled, but those international observers who entered the industry post-2008 and grew up on a diet of US-led QE can be forgiven that they expected intervention, they probably did not realise that in China doing nothing much is a policy option.

And how much nothing much is that? Let’s draw a broad comparison. In March 2020, at the tipping point for the COVID epidemic, the PBOC lowered interest rates by 0.20% and since then has ushered in a series of smaller cuts down to the current 3.55%. Inflation in China is currently a deflationary -0.30%. However, the Fed, on the other hand, immediately cut US rates to near zero, where they remained until March 2022 and have since risen to 5.5% as the Fed attempts to stamp out surging US inflation. 

China currently faces several negative headlines: falling export markets, huge regional/local government debt, a property market on the edge of imploding, and former financial behemoths missing debt repayments. But China has not collapsed, and here and there, the economy has a positive hue, which may prevent Beijing from pushing on the tiller too hard in any direction. However, domestic confidence remains an intractable problem.

So why the domestic negativity? Why the lack of confidence? Thinking out loud and having no quantifiable insight, I would look to two reasons. Firstly, deflation. An investor must ask, if I buy it today, who will buy it from me in the future? And if the answer is no one, then the investment is to be avoided. Why buy, why invest if the future holds no promise of profit?

Secondly, the issue is social. If you were born following the end of the cultural revolution, you would now be in your mid-forties, and your entire life experience is within an economy enduring massive growth, compounding 10% GDP growth per year is all you have ever known. However, today, these 40-year-olds are cut adrift, with redundancies and downsizing stalking the better neighbourhoods. China has been through that before, but this time, there is no promise of rapid growth on the other side.

Maybe GDP growth will be 4.8% next year and 4.75% the year after that, but these are not boom times, so the 40-year-olds, these middle and senior managers across the whole of China, are having to recalibrate their personal and commercial budgets to where slower growth is now the default setting. It is an environment they have never experienced before and a huge shift in expectations. Comingle that with deflation, and they are understandably defensive. It’s no collapse, but it’s no party either.

And finally... Singapore, September 5th, at the Asia Pacific Petroleum Conference (APPEC) Day 2 at 10 am, I will be on stage discussing “Will we see the launch of an alternative trading system led by China and Russia.” If you are or will be in Singapore around this date and are interested in China and accessing the Chinese commodity markets, I would be happy to meet up.

Have a good day,

John