Is it time to 'buy the dip' in China?

It appears authorities are more relaxed about slower growth than before, and more preoccupied with the distribution of income and wealth.

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  1. Charles Stanley

The Chinese economy has been slowing this summer and autumn. Many lives were lost when floods hit Henan in July, with rivers breaking their banks and train tunnels filling with water. More recently, half the country has suffered power cuts and electricity rationing. There has been a shortage of coal, which accounts for more than 60% of the power produced. Many provinces are up against their emission targets for the year and decided to ration power to keep beneath them. A series of outbreaks of Covid-19 have evoked strong responses, locking down cities and areas to prevent spread.

China’s export trade has been disrupted by partial port closures, shortages of containers and supply disruptions hitting factories. The authorities have until recently also been deliberately slowing the economy to head off inflation, and to bring the high and rising levels of property debt and house prices under control. In the summer the Central Bank and Banking Commission announced a new drive to clamp down on Ponzi schemes, excessive leverage, shadow banking and loans disguised as investment products. This regulatory action has led directly to the difficulties faced by Evergrande in paying interest on its massive debts, and to questions being asked of Sunac and Fantasia, also heavily borrowed property companies.

Whilst China shows modest overall levels of state borrowing and has this time round eschewed swelling the balance sheet of its Central Bank, there are domestic and overseas worries about the level of debt in the Chinese corporate sector, especially around property. There is a feeling in markets that the authorities will avoid a systemic collapse by managing the domestic debt carefully, and offering just enough assistance to help the retail public whilst damaging the equity of the large property companies that are overstretched. There is not the same feeling about dollar debts that these groups have built up, where the Chinese authorities may take the view that they do not wish to encourage overseas borrowing and could live with some salutary losses hitting those markets. Evergrande has a series of dollar bonds with interest to pay and some repayments of capital.

The Chinese authorities have plenty of ways of offsetting some of the slowdown and gloom. They can carry on supplying extra liquidity to markets as they have been doing. They could cut the required reserve ratio for banks again to allow more lending. They could cut interest rates. They can boost local government bond issuance more. We should expect more of this to happen. Today we learn that they will ignore the emissions targets to allow more coal to be mined and burned to tackle the black outs. Policy is, at last, shifting a bit to limit the damage.

It does appear, however, that they are more relaxed about slower growth than before, and more preoccupied with the distribution of income and wealth than with the magnitude of the growth figure. They seem to be taking some pleasure in watching the fall of entrepreneurs and rich people, as share price collapses and debt repayments come to haunt the former highflyers.

China is engaged in consolidating a new communist revolution with President Xi and his supporters aiming to exert much more power over Chinese society and government. They are keen to build strong defence forces and the world’s best industrial base to support their military position. It is unlikely they will invade Taiwan anytime soon, but getting themselves into a strong enough position to face down the USA in the future is clearly an aim. China’s success in taking over both Macao from Portugal and Hong Kong from the UK by peaceful means has left her seeking the chance to control Taiwan. China is busy building a large navy and air force and fortifying islands and atolls well out into the South China Sea as part of her expansion drive.

It is difficult to judge from the West without access to sources deep within the top levels of the communist party how far the Chinese government wishes to take its new cultural revolution, nor how successful it will be in containing it. Given the strength of the language and the array of actions taken so far, it is clear enough that private enterprise, profit and share prices can be sacrificed for the greater good. There is a new hostility to foreigners, especially to the USA and its friends. This means buying the dips in the China market to enjoy the inevitable policy response to limit the downturn may be partially offset by the structural change of policy and culture. The authorities wish to restore more normal Chinese domestic output and consumption but are not out to help foreign owners of capital to make money again by investing. 

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