It wasn’t just a complete narrative fail, the fiasco uncovers much deeper and more intractable problems resurfacing at a most inopportune time. There are lessons to be heeded across the world, but they won’t be even as we get full confirmation the hole was a crap-ton deeper than originally thought.
We were supposed to be done talking about China and US banks. Practically everyone said the former’s problems (we’ll get to the latter later) were spent in last year’s pandemic politics. Lifting those would free the Chinese economy to soar.
In fact, quite a few were more worried about the situation going completely in reverse. A plethora of news articles showed up touting China’s vast ranks of consumers who had spent their time during lockdowns hoarding cash (they did). Not only did they possess the money, they were, we were told, spoiling to use it (they did not).
Once the consumer flood began, all the “good” work done by Jay Powell and Christine Lagarde would be undone in the flash of Xi Jinping’s serial (killer) smile. Writing in Bloomberg just a few days before SVB, a couple authors stated, “The revival ought to be a good thing after last year’s fiasco. It might even be too strong for worrywarts far from Beijing.”
To make matters worse for those wart-ed worry-ers at the FOMC and inside the ECB, China’s “credit impulse” was absolutely surging, too. According to government figures, there was a tidal wave of borrowing especially among Chinese corporates. Consumers were ramped up and ready then all manner of businesses would pile right on the roaring recovery.
And it never happened. If you believed the financial media, it was a done deal. Had you consulted with markets – any of them apart from stocks – you’d have known the truth the entire time.
Not only did recovery fail to materialize, very quickly even the mainstream tone shifted back to the level of last year’s dull thuds. China’s recovery wasn’t just faltering, worse than that the economy and financial system have since been giving off all the appearances of another drop and in the near run.
China is being sucked into the global recession with everyone else rather than Beijing’s shifting coronavirus enlightenment redeeming the world (oh, the irony).
Rather than stop and analyze why, what really went wrong, the same proponents have already moved on to their next sales pitch. This one is even more ridiculous: the world will actually be saved because China’s reopening failed.
Surely the Communists will be forced to concede such weakness at the worst possible time, when, again, trade is falling and the external environment threatens to do worse on top of the unsettled and unsettling domestic situation. Instead of soaring, the souring is near to complete which has to mean Keynes.
If so, Chinese authorities will be rolling out the Big Guns, the massive flexing of monetary measures alongside muscular government spending meeting in the paradise of technocracy. Among those hoping for the slimmest shiver of truth in any of this, shares of beleaguered property developers jumped this week.
From Reuters earlier this week:
“China property stocks listed in Hong Kong jumped as much as much as 7.9% on Tuesday, as investors clung to hopes that Beijing would roll out more supportive measures soon to bolster the embattled sector.”
Real estate was once the giant towering over Chinese finances and economy, the preferred and chosen means to carry out carrying China through any global rough spots. Organic external growth falling off? Shoot some liquidity into property developers and let municipal governments build roads, sewers, entire ghost cities of infrastructure waiting for the world to re-align.
Never trust any QEs.
China once did, and as it looked favorably upon them the country would go on to build outrageous asset bubbles in 2009 and again in 2012 (both curiously timed to more QEs). Xi’s horses and men would give it one more try in 2016.
Unlike most Western Economists who stare at the American unemployment rate as though the number is some ancient sun god delivering immutable economic truth, the Chinese saw through the mysticism because they could see truth in their own increasingly pitiful receipts. Xi recognized the shift and changed the internal course a generation ago.
Keynes has been exiled from the Forbidden City ever since.
It has been especially hard on developers. Beginning in 2021, property sales started running way behind at the same time Xi’s government swooped in to limit their debt. It was an increasingly lethal combination, and Evergrande was merely the first tip from out of several larger icebergs.
Understanding the systemic lethality of what his predecessors had done before his reign began, and then his own advisors (Li Keqiang) had unleashed during its earliest stages, Xi Jinping Thought enshrined in the Party’s Constitution means the real estate bubble must be deflated slowly.
That deflation isn’t just an analogy. It is a background condition behind everything in China and beyond.
The defaults have been piling up and there’s no sign it’s getting any better; thus, hopes are shifting to major “stimulus.” According to one set of mainstream estimates:
“Corporate delinquencies on offshore notes totaled a record $46.5 billion in China last year, according to data compiled by Bloomberg. Largely shut out of credit markets, builders defaulted on more than 140 bonds in 2022 and missed payments on a combined $50 billion in domestic and global debt based on issuance amount.”
A senior director at S&P Global Ratings in Hong Kong was quoted as saying, “It’s a precedent-setting moment.” Yep, and not in any good way.
Developers can’t raise funds without taking on new debt, and even if China’s government were to relent on constraints (red lines) in any meaningful way, what then? Will banks come rushing to fill in the void? How about offshore investors already burned on missed payments, defaults, and frustrating, protracted legal fights just to get companies to negotiate on debt restructuring?
It was never about Zero-COVID. China’s economic problems run deep, beginning with the failure of the pre-crisis paradigm, the inability of the world to recover in any meaningful way from that ancient monetary crisis. And that’s just the starting point.
In a bid to manage that baseline decline, central planners in Beijing somehow have to align the property bubble downward with legit post-2008 economic potential which is itself an ever-falling target. It’s not a race to the bottom so much as a slow-moving train wreck.
And we’re getting a reminder of it as I type. Reopening was doomed from the start.
One reason we won’t expect too much monetary assistance from outside, the Chinese yuan is tumbling against the dollar as dollar providers who long ago gave up on reopening are back to charging high premiums for China to access eurodollar funding for any purpose. The worse the situation gets – whatever any forthcoming limited “stimulus” – the higher that goes, the greater the knock-on effects around the world.
Global trade suffers, has suffered, sure, but so does global finance. Recognizing just how coordinated and harmonized risks are and can continue to be, monetary and market agents become much more averse when something like this happens anywhere, applying the same scrutiny elsewhere around the world to a world that needs them to forget all these things.
And it’s not like the rest of the world has decoupled from China and is somehow thriving. It’s yet another black mark upon an already-reeling sweeping economic pandemic.
Who would lend to property developers in China after this? Who’s going to be lining up to purchase commercial real estate across the US?
The latter is where the next leg of the bank crisis falls. Balance sheet impairment is balance sheet impairment. The big global banks aren’t directly implicated in China’s property developer mess, but their best customers sure are (and likely as much based on their past advice).
America and Europe have been led into mini-property bubbles. Where the Chinese is long-running and well-documented, inching closer to its terminal stages, these others are relatively new, the product of so many mistaken impressions about the post-2020 world and are careening toward their finals. China’s imbalance was over a pre-2008 environment that no longer exists. The Western buying and building frenzy in 2021 was over a world that never actually did.
The Federal Reserve’s own May 2023 Financial Stability Report summed it up this way:
“Many contacts saw real estate as a possible trigger for systemic risk, particularly in the commercial sector, where respondents highlighted concerns over higher interest rates, valuations, and shifts in end-user demand. Some market participants associated risks in real estate with the emergence of banking-sector stress, noting some bank exposures to underperforming CRE assets could prompt instability.”
Authorities here desperately want to make Silicon Valley Bank and First Republic the poster-children for rate hikes taming “inflation”, yet their failures had so much less to do with underwater US Treasuries and agency MBS than we’ve been led to believe.
Pools of global dollar liquidity are tightening up, and that was before March.
There are many possible benefits from a planet-wide, highly interconnected monetary and financial system (eurodollar, not dollar) in terms of speed, efficiency, and most of all reach (which is what reserve currency is meant to do). But there are as many and worse drawbacks and this is one.
As the global economy hits recession, that recession hits China before boomeranging back around the world. Real estate woes there and everywhere become damaged systemic avenues walling themselves off from every possible angle of further trouble. Calling it de-risking makes it sound almost benign when it is anything but.
And right here is right where the complete and utter failure of reopening hurts the most.
Globally synchronized. While it isn’t quite fully just yet, we have to acknowledge how it is getting closer and closer even as authorities go back with their heads firmly in the sand; ostriches, never hawks. The appeal to Beijing to “save” us all from all this is a key milestone in the anti-progress that’s far more profound than any reopening narrative.
