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Today’s focus: The latest series of data shows that China’s economy is still mired in the mire, with various stimulus policies from the Central Committee of the CCP failing, officially entering a “balance sheet recession”.
Nomura Securities chief economist Lu Ting: The environment China faces may be “perhaps even more difficult than Japan in the 1990s”.
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Let’s first talk about the US stock market. This Thursday, two pieces of good news stimulated the rise: one is that social retail sales grew by 1%, far exceeding the Dow Jones’ expected 0.3%; the other is that the number of initial jobless claims has decreased, indicating that the employment situation in the US is still good.
These two pieces of news indicate that the US economy is not as pessimistic as the 4.3% unemployment rate for July announced on August 5. Therefore, on Thursday, the S&P 500 rose by 1.61%, continuing its six-day rise, basically recovering from the losses since August 5.
Stephanie Rosen, chief economist at Wolff Research, wrote on Thursday, “Today’s stable retail data and jobless claims remind people that the sky of the US economy has not fallen.” “Yes, the economic momentum has cooled, but it seems we will not immediately fall into recession.”
These results are consistent with my analysis on the day of the stock market crash on August 5 and subsequently on the “Current Affairs Talk” program on Voice of America: The US economy has some troubles, but overall, the various news currently are optimistic, and there should not be major problems before the end of the year.
On the same day, the National Bureau of Statistics of the CCP also released economic operation data for July, showing that the total social retail sales in July reached 3.78 trillion yuan, an increase of 2.7% year-on-year, higher than the market’s expected growth of 2.6%. A-shares in China rose accordingly, but with apparent weak support, still below 2900 points.
Analysts believe that the boost in July consumption in China is significant. However, if we look at the data from each month this year, we will find the situation is not optimistic. Because total social retail sales in the first six months compared to the same period last year increased by 3.7%, and it dropped by a full percentage point in July.
Moreover, while consumer spending on dining out and entertainment is increasing, spending on big-ticket items such as cars and jewelry is softening. Chinese households seem to be cutting back on non-essential spending, and the general trend of cost-cutting is affecting expenditure decisions.
If we look at other data, we will find that the Chinese economy is still stuck in the mud and has not recovered from the epidemic.
In China, factors affecting consumption, besides income, mainly include real estate and stock market indices, both of which are clearly in a downturn. According to Reuters, based on data released by the National Bureau of Statistics of the CCP, housing prices in 70 major Chinese cities have fallen by 4.9% since the beginning of the year, thus creating the largest decrease in 9 years, since June 2015; on a monthly basis, a decrease of 0.7%, the same as the previous two months, and has been declining for 13 consecutive months. In the 70 cities surveyed by the National Bureau of Statistics, house prices in 66 cities fell month-on-month in July, while in June, 64 cities saw a decrease.
The reduction in household asset holdings implies a continued “downgrading of consumption”, such as adding a boiled egg instead of a chicken leg to a meal. In fact, data from the first half of the year shows that starting from February this year, the decline in consumption has been increasing month by month. Consumers are not only spending less money, but the rate of reduced spending is also growing.
From an investment perspective, fixed asset investment increased by 3.6% year-on-year from January to July, lower than the 3.9% growth in the first half of 2024. Meanwhile, real estate development investment fell by 10.2% compared to the same period. According to calculations by Goldman Sachs, overall investment in July increased by 1.9%, lower than the 3.7% growth in June.
This also means that China’s economy continues to rely on the manufacturing industry for growth, and the measures taken by the CCP’s highest authorities in recent months to stimulate consumption and investment, including interest rate cuts, housing promotion, and careful planning and convening of the 20th third plenary session, have almost had no effect.
Of course, if one were to investigate why Chinese enterprises and individuals are “lying flat”, I am reminded of a post by Chinese economist Guan Qingyou. He said, “Whether playing cards or chess, if the rules keep changing, or if someone always cheats, slowly, no one will want to play anymore.”
The latest data released by the National Bureau of Statistics of the CCP shows an urban unemployment rate of 5.2%. Official explanations attribute this mainly to seasonal effects brought about by recent graduates, but it is widely known that the graduation rate of Chinese universities is often falsified, leading to more and more people being practically unemployed upon graduation, with no quick improvement in sight. On the other hand, China’s employment statistics are often adjusted, such as in June when being an internet celebrity live streamer was considered employment. However, statistics show that China’s live streaming industry exhibits a very typical “Matthew effect”, with about 2% of streamers earning 80% of the money, leaving the remaining 98%, or around 15 million people, earning only a few thousand yuan on average per year, even struggling to meet basic needs.
Other recent data released by the CCP also indicates the current difficulties in the Chinese economy far exceed cyclical or seasonal impacts.
1. In the second quarter, foreign direct investment liabilities decreased by nearly $15 billion, marking the second time this data has shown a negative value since recordkeeping began, with the last time being affected by the 1997 Asian financial crisis. The outflow amount was also higher than the $12.1 billion in the third quarter of the previous year. From the timeline of this reversal, at the beginning of 2022, when the CCP locked down Shanghai, foreign direct investment began to plummet sharply and has not recovered since.
2. New loans have significantly decreased, indicating the majority of Chinese enterprises have already “lied flat”, unwilling and afraid to borrow for investment.
The “Social Financing Scale Report” released by the People’s Bank of China last week showed that in July, new loans were 260 billion yuan, a decrease of nearly 88% from the previous month, and far below analysts’ expectations of 450 billion yuan. This is only about one-tenth of a typical month’s amount, and the magnitude of the drop can be described as severe.
Moreover, the People’s Bank of China has only released cumulative data from January to July, with many figures not individually providing monthly data for July, needing additional separate calculations. According to calculations by Reuters, household loans in July (mainly mortgage loans) dropped by 210 billion yuan, while in June, they increased by 570.9 billion yuan. Enterprise loans fell from 16.3 trillion yuan in June to only 130 billion yuan.
The official explanation provided by the CCP is a “liquidity squeeze”, which refers to differences caused by statistical methods. However, looking at the M1 money supply of individuals and enterprises, the M1 balance has decreased by 6.6% year-on-year, indicating continued negative growth, with a 5% decline last month. Meanwhile, M2 has increased by 6.2% year-on-year, showing that many enterprises and individuals prefer to convert demand deposits to time deposits or invest in wealth management, rather than investing or spending. This is a typical collective “lying flat” situation.
Since July, more and more enterprises and individuals have begun to shift deposits into wealth management and purchasing, leading to a significant increase in government bond prices. As I mentioned earlier, this will increase financial risks in China as government bond yields correspond to long-term interest rates set by the central bank. The rise in government bond prices may lower long-term interest rates, leading to yield curve inversion risks, which the CCP fears. Consequently, they have recently resorted to phone calls, directly prohibiting rural commercial banks, securities companies, etc., from engaging in government bond transactions. However, it is clear that the effect has been unsatisfactory.
3. Social total assets have decreased in July, marking a significant turning point in the “balance sheet recession”.
Last year, based on Japan’s lost 30 years, Japanese economist Gu Chaoming proposed the theory of “balance sheet recession”, drawing widespread attention from the official, academic, and industrial circles in China. He pointed out that the cause of this recession is high debt in the private sector, leading to individuals or enterprises prematurely repaying debts to increase savings rather than spending or investing, thereby slowing down or reducing economic growth, ultimately resulting in an economic recession.
From last year to now, Chinese scholars generally believe that there is no such thing as a “balance sheet recession” in China as it was in Japan. However, from the latest data released by the CCP’s central bank, we can see that the social financing scale increment for the first seven months of this year totaled 18.87 trillion yuan, a decrease of 3.22 trillion yuan compared to the same period last year, representing a 14.6% decline. Looking at the monthly figures, new yuan loans in July were 260 billion yuan, down by 859 billion yuan from the same period in 2023, at 345.9 billion yuan. This is the first decline since July 2005. This has led the economics community to once again question: Has the Chinese economy already entered into a major recession model similar to Japan in the 1990s?
Lin Jiaxin, Chief Economist in Greater China for Credit Agricole CIB, said, “This is a fairly weak report, indicating that demand for loans from households and businesses remains very soft.” “This suggests that the likelihood of imminent recovery remains small, and the government needs to take more measures to ensure the achievement of this year’s goals.”
Many are urging the Chinese authorities to expand loans and spending to address the constantly declining private demand. However, the International Monetary Fund (IMF) recently pointed out that the CCP rejected their proposal to use $1 trillion to save the housing market. Meanwhile, the recently concluded 20th third plenary session of the CCP did not introduce any large-scale government investment or stimulus plans. Earlier, Xi Jinping also rejected suggestions from US Treasury Secretary Yellen and others to build social security systems such as healthcare and elderly care in China to encourage people to consume.
At the “2024 Boao Real Estate Forum” held in Lingshui, Hainan on August 14, Lu Ting, Chief Economist at Nomura Securities, pointed out that the current contraction in China’s real estate is not just in major cities but more prevalent in medium and small cities, unlike the situation in Japan back then, where there were mainly concerns in the residential sector, rather than the large-scale commercial real estate bubble seen in Japan at that time. Of course, he noted that there are also some issues arising in China’s commercial real estate sector now.
Lu Ting stated that there is still a significant number of unsold new properties in China. According to him, Japan in the 1990s did not have a severe issue of unsold new properties. However, in China over the past 20 to 30 years, the real estate industry and fiscal system have been tightly intertwined, so the shrinkage of the real estate industry is also impacting the entire Chinese fiscal system.
Lu Ting believes that opinions across various sectors that compare China’s current economic situation to Japan in the 1990s are mainly in the context of the trade war Japan experienced. However, the trade war in Japan at that time was a “relatively pure” trade war without serious geopolitical issues, and setting up factories in the United States, Europe, and other places was not a major problem. Compared to Japan back then, it is much harder for Chinese businesses today to expand overseas, with the difficulty primarily in Southeast Asia, Mexico, and establishing factories in the United States. China’s attempt to boost its economy by having Chinese enterprises “go global” to compensate for domestic demand deficiencies is facing an environment that is “far more complex than Japan”.
Lu Ting pointed out that looking from these perspectives, if the current Chinese environment must be summed up, he believes it may be “perhaps even more difficult than Japan in the 1990s”.
Also attending the forum, Chen Huai, a professor at the Graduate School of Urban and Rural Construction Economics of the China Academy of Social Sciences, implicitly pointed out that China’s current problems far surpass those of Japan. He hopes that the Chinese media “do not blindly follow the crowd and continuously spread information that is not real”, and examine countries that have lost for 20, 30, or even 40 years; which ones haven’t truly lost? “Look at the lives and employment situations of Japan’s ordinary people today.”
Chen Huai asked, “What did Japan lose?” Up to now, Japan’s economy has been of high quality. Who says Japan has low quality or expansive development? Are its industrial structure and research and development capabilities not world-class? Are the lives of Japan’s ordinary people not world-class? Are Japan’s security systems and infrastructure not world-class up to this day?
So, in such an environment, how should businesses and individuals invest, work, and live?
I believe, firstly, do not fantasize about high investment with high returns, prioritize securing your own financial safety; secondly, manage cash flow well, ensuring you have enough liquidity to maintain a normal life; thirdly, maintain a good mindset. Here, I also want to borrow a phrase recently said by economist Guan Qingyou to share with everyone: “During this garbage time of history, there must be a sense of relaxation.”
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