Is China in Crisis?

0:00If you've been considering futures trading, now might be the time to take a closer look. The futures market has seen increased activity recently, and Plus 500 Futures offers a straightforward entry point. The platform provides access to major instruments, including the S &P 500, NASDAQ, Bitcoin, natural gas, and other key markets across equity indices, energy, metals, forex, and crypto. Their interface is designed for accessibility. You can monitor and execute trades from your phone with a$100 minimum deposit. Once your account is open, potential trades can be executed in two clicks. For those who prefer to practice first, Plus500 offers an unlimited demo account with full charting and analytical tools.

0:45No risk involves while you familiarize yourself with the platform. The company has been operating in the trading space for over 20 years. Download the Plus500 app. Trading in futures involves the risk of loss. It is not suitable for everyone. Not all applicants will qualify.

1:09Is China in crisis? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Gio Chen, author of the Fidenza Macro Blog. Hi, Gio. It's great to see you again. Hey, Maggie. Good to be here. So relatively quiet day for US markets. Stocks had a modest rally. It's been a tough month. Treasury yields edged a little lower. But I think really it's the headlines from China that everyone's been tracking and talking about. We saw Chinese official efforts over the weekend to support the stock market seem to fail to move the needle or do much. The early stock rally there fell by the time we all plugged in.

1:50Foreigners continue to pull money out of the country. Investors remain bearish on the yuan. and the U.S. Commerce Secretary is in Beijing for talks amid heightened trade tensions between the two countries and political parties here sort of trying to outdo each other in terms of sounding hawkish on China. You know, when you look across everything that's going on, what's your sense of what's happening with the Chinese economy? Yeah, China is definitely playing a big, big role in global macro. And it's been quite a lot of news out of China, more than usual, for sure. And I just think that over the next year and decade, China and its rivalry with the US is going to play a huge role in terms of commodity prices, FX, the cost of borrowing.

2:42And basically what's been going on, to give you the cliff dose version, is back in the 80s and 90s, China had the policy of building up its real estate sector, moving people from countryside to cities, and that enabled a massive boom in real estate. And that's how China got to be as big as it is now. Well, part of the reason. But they extrapolated this too far out, and too many homes were built, and now there are not enough people to live in them and to buy them. So that urbanization trend has pretty much slowed to a halt. And as a result, housing prices have plummeted. And the average homeowner on the street doesn't know what they can sell their house for, how much it's worth.

3:34There's very little liquidity. Even in Shanghai and Beijing, where home prices have been historically very strong, um you know prices have gone down a lot more than people have expected so as a result they're not saving they're not uh they are saving too much and they're they're not spending a lot which is understandable because you know we all know when you go underwater or you think you're underwater it's it's such a big part of a person's basically equity right i mean it's like the biggest investment you make so when there's there's like it's interesting the way you phrased because I think we all know that there was a property bubble building, but you kind of wove in some of the demographic issues that they're facing, which sounds worrying because it doesn't sound like it's an easy fix.

4:29No, not at all. I mean, this is a bubble. I mean, possibly one of the longest and biggest bubbles in the history of financial history. I mean, I mean, it's just been going on for decades to the point where people really thought that real estate was the financial asset to acquire, to strive for. And a lot of that is going away now. So now developers are defaulting and that's creating a massive hole in these local government financing vehicles. And these vehicles are also turned into wealth management products that people invest in. So it didn't matter whether you invested in real estate or some kind of wealth management product, you're now underwater.

5:14And over the past six months, pretty much all the economic indicators for China have been trending lower, whether you're talking about industrial production, retail sales, inflation, unemployment. Youth unemployment has been trending well above 20%. and China just decided to get rid of that statistic. They're no longer publishing it, which shows you how bad things are. It was really interesting. Everyone knows, or there's a general understanding that the data is less than reliable, or at least by the sort of transparency standards of other developed countries. But that decision to stop publishing youth unemployment, Something was very psychological about that.

6:02I think for a lot of people, it was a sign that, whoa, wait a minute, things might be a lot worse than we thought. Because you have a very large youth unemployment problem, and it doesn't take long to sort of thread together the potential social unrest that that can bring. And the fact that they stopped publishing it, I think, really struck people, struck a chord with people, and began to sort of add to those real concerns. So the other thing that we know about China is a lot of their strength came from exports, right? Is there an ability? I mean, we know that there are economic problems kind of around the world.

6:35Everyone's trying to pull themselves out of post-pandemic that global shutdown that was unprecedented. And everyone's been battling inflation and high rates. And we sort of know that it's hard to find a place that's not struggling. Can China use its sort of export strength to help offset this structural problem they have with real estate? Yeah. You know, trade is the left blood of China's economy. And unfortunately, the other trend that's not going in its favor is really geopolitics. So if you look at the exports of China, that's been treading lower too. And that's really because due to geopolitics, Western countries don't want to buy as much stuff from China as they did before.

7:24It's this trend of diversifying supply chain, nearshoring, offshoring. So that's hitting China. And on the import side, which is the line in blue, because of China's weak economy, they're not buying as much stuff from other countries too. So imports and exports are both trending lower right now. Yeah, which is a problem. I mean, that's your sort of dual levers of growth here. Because we do know that the Chinese were trying to create a situation where they changed the dynamic of the economy, right? Lean more into a domestic consumption, kind of diversify away from exports. But that doesn't seem like they've been able to get much traction there.

8:11Yeah, you know, I would say that the West is doing its best to prevent China from shooting up the value chain in terms of tech. So, yeah, they're just fighting an uphill battle. So it's interesting, Evergrande shares started trading today again and fell 87%. Bo is asking how bad is the real estate situation? So are there any glimmers of hope when it comes to stabilizing that sector? It's looking pretty bleak. I would say a lot of people are hoping that the Chinese government is going to stimulate. And to a certain extent, I mean, they've been doing things at the margins, loosening policies, but none of it is really resonating with investors.

8:59And as a result, because of the weak economy, weak trade, it's been affecting the rest of the world. Europe is heavily tied to China. A lot of their demand comes from China, as well as the rest of emerging markets. So global trade, global growth is kind of stagnant right now because of China, whereas the U.S. has been doing pretty well. And that's been boosting the dollar. So with the strong dollar that's been putting a little bit of pressure on risk assets, you know, another thing is that as China tries to sell dollar China in order to keep its currency strong, they have had to sell treasuries from their reserve balances in order to fund that intervention.

9:45So, you know, there's this doom loop that happens when China's weak, which results in them having to intervene and sell treasuries, which boosts, you know, as yields go up, that also boosts the dollar. So it's this kind of China doom loop that's been going on. And it's tough to know exactly what's going to what's going to stop that. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

10:20Marco Pavek had a conversation with Chen Zhao on the platform last Friday, and a geopolitical kind of went around the horn. And a lot of it was spent talking about China for the reasons that you painted. I mean, it's not just a Chinese issue. Of course, it's a huge issue for the global economy right now. And both of them expressed concern that the Chinese government wasn't doing what it needed to in order to get control of the situation. Let's have a listen to a clip from that, and then we'll talk on the other side. You just go in and spend a heck of a lot more money and borrow from the private sector and spend it.

10:54The Chinese public sector's debt is better low still. They can do that. But the problem here is Xi Jinping is very reluctant to do it. Why? Because we, means the foreign experts, just kept telling the Chinese government, don't do it. If you're finding out the public sector debt, you're going to have trouble down the road. But he's very reluctant. He's very into deliberating. That's where the problem is. You're delivering the economy into a deflation. So my bad is this. The situation right now is not terribly enough so that they are forced into a major action yet. So that's why he's going to do piecemeal reflation here and there.

11:42At the same time, the growth is going to run lower and lower until something that really bad happens. I don't know what it is. I mean, think about the zero COVID policy. That's a Xi Jinping. He's hallmarked in his policies that, hey, don't be bothered by all this Western press. Stay steadfast. So we're having to stick to the plan until what? Well, the COVID policy, until the goddamn economy broke down. So that's why he just buggered off. Everything break loose. So I'm concerned that he's going to make the same mistake. Hey, steadfast, don't let me know. We're not going to flop the system with stimulus.

12:24Right now, this is the time you want to flop the system with stimulus. But he's not going to do it. So I think I think Claude is going to grind lower and lower until something bad happens. I don't know what that is. But hey, I don't think this downside is completely exhausted yet. But we're getting there pretty quickly. It's a little long. We don't usually play clip that long. But it was such a good conversation. and yes, they talked about Taiwan and a lot of other stuff and Ukraine and Russia. So you wanna check it out. It is, if you wanna watch that, of course, or any of our other great content, just scan the QR code and get on our waiting list.

13:02There's always a lot to unpack and both of them weighed in with their views. That was just Chen there, but it's very interesting, Gio. I wanted to run that because it's not just an economic problem. They're sort of suggesting there's political risk here as well. Yeah, absolutely. And, you know, what's interesting is that China has had very large scale stimulus in the past, but Xi himself has never carried one out. So, you know, one has to wonder whether he is willing or able to carry out the kind of stimulus that's required to help the Chinese economy recover. And I do agree that he most likely has an ideological bias against stimulus because he's kind of seen how stimulus has gone for the U.S., for the rest of the world.

13:51Right. Exactly the point that they were talking about. Like, did the lessons presumably learned, but is that kind of standing in the way to find a solution? Yeah, and unfortunately, it might result in things having to get worse before he resorts to it. I mean, when you just look at financial history going all the way back centuries, I mean, this is the story as old as time. And I think there is a reason why every country, every leader ends up doing stimulus at some point, because really it's the only way out. And at this point, based on everything that I've read, I just feel like it's gotten to a point where people are so bearish to the Chinese economy already.

14:37And pretty much the whole market has given up on the hopes of Chinese stimulus. In fact, there was an economist cover that just came out that shows the headline is Xi's failing model, why he won't fix China's economy. I think we have that cover if we didn't show it. So this is a very interesting point. Yeah, it's always that contrarian. If it's on the cover, uh-oh. And we do have a lot of comments on that. Jim Griffin asking, how will Xi Jinping's apparent disdain for capitalism impact China's economic growth? And I think that's what everyone's kind of dancing around. Does he have an ideological block to kind of bring out the bazooka helicopter type money that creates other problems, but will potentially solve the one in front of you now.

15:31But everyone's having that conversation. So I guess, is it priced in or is everyone too bearish that there's risk now that they do do something? Yeah, I mean, I think the market has priced in all this already. And I think the bar now is very low for any kind of positive news out of China. Even if it's just a matter of economic data turning higher or if they do any kind of stimulus, I think the bar is just pretty low for a positive market reaction. So, you know, I think it's actually not a bad time to be like nibbling on Chinese equities, for example, Chinese risk assets. Yeah, just because, you know, I think a lot of this is already priced in and it's already being widely spoken of in the press.

16:29That's fascinating. Not for the faint of heart we should put out and not investment advice. Just just musings and thoughts on on market sentiment. But it's interesting. So, by the way, fantastic questions coming in, everyone. Love them. William is asking, and this is on my mind as well, William. Is it a losing battle for China to defend the yuan? What happens to the yuan when the Fed raises another 25 to 50 basis points, if they raise another 25 to 50 basis points? I think part of that, Gio, is even if sentiment is really bearish, the market is at this point kind of, it seems like it's going to push the Chinese authorities until they do something.

17:11We're at that point where whatever they're doing, as you pointed out, is not enough. And the market sinks right away. Evergrande's down 87%. The market rally lasted like one nanosecond. It's down. The yuan keeps going down no matter how much they intervene. It seems like this is going to continue until there is an effort. But his question is, can they defend the yuan? Can they stop these market forces? Yeah, actually, so the Chinese yuan is the one asset. That's not one that I'm bullish on, actually, because I do think that there is going to be continued pressure on the Chinese yuan. And even if they do a massive stimulus, that will most likely involve fiscal and monetary.

17:56And the monetary side is likely going to pressure yuan even more. So I do think that when they do decide to offer any kind of stimulus on the monetary side, it will very likely involve some kind of weakening of the yuan. So they're going to loosen up on intervention and let the yen slide further. So, you know, that's one asset that I would not be going long as part of this view. And are there places that you feel, so it sounds like this is potentially a short term. You tell me, what's the time frame? Because it sounds like it's based on the market positioning more than any kind of feeling that they'll figure out a long term solution.

18:42Is that fair? Yeah. Yeah, that's right. It's just more of a short term, like three to six month time horizon is how I'm personally playing it. Right. And because historically, you know, Chinese risk assets, Chinese equities have not really been great for buying and holding. They're more for tactical trading, in my view. And so Roger was asking, what about Chinese internet stocks like KWEB? I mean, are there certain areas that even with that short-term play based on sentiment, you feel like some things will benefit more than others? Are there things that you're like, no way, that sector's off? There's actually been more regulatory relief for China tech.

19:29So actually, I personally think it's not a bad place to be. And KWEB also has a pretty strong correlation and higher beta than to the Chinese index. Oh, okay. Great answer. So TrillionX asking, if China is melting down, should we not have lower oil and copper prices? Yeah, that's a really good question because copper has held up very well. It's just been kind of holding in there, going sideways. And oil has actually been treading higher. So, and I found that really interesting. So I, you know, find the trend in oil quite robust. And, you know, I think it's just a sign that if there's any kind of positivity out of China, it's definitely bullish for oil because oil can't even go down on all this weakness in China.

20:25That's a great point. And one will likely bring up with Tony Greer, who's going to be with us tomorrow, because I think he's been looking at that too. Like when everything's lined up, it should be super negative. If it's holding in, that's probably one of the signs on his dashboard. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

20:51So Serge asking, getting back to this idea that it might take something serious to kind of jolt the government, the Chinese government into pulling out the bazooka. I'll just call it that because that's what everyone else is referring to. But coming to the table with some more, some more, you know, substantive stimulus, if you will. Serge saying, Mr. Chen, if China potentially had a Lehman moment as the U.S. did during our gripe financial crisis, is it possible they would be able to keep it quiet given it's a more centrally controlled economy? Good question, Serge. Yeah, absolutely. I think, and who knows?

21:29I mean, maybe there have been many Lehman moments in China where they kind of just like patch it up with their reserves. I mean, it's very opaque. You know, in the US, like all this plays out in the public sphere, right? There's enough transparency, corporate transparency. and you have liquid markets and even politics and policy play out in a public sphere where if this was happening in the US, it would be all over the news. People would be following it. Politicians would be writing bills and everyone would know what's going on there. But in China, this is all happening behind closed doors, which just makes this all so much more interesting and mysterious.

22:24Yeah, and hard to gauge, right? It's hard to sort of figure out the next move. Edmund asking, what would be the impact of a weaker yuan and cheaper Chinese exports? That's a good question. And I think this trend of cheaper yuan and cheaper exports is exporting deflation to the rest of the world. And that's definitely helping the disinflation trend in the rest of the world. So it's kind of helping Jerome Powell do his job to a certain extent. Yeah, so the fact that there's very slow growth is a problem because China's not sort of fueling that global, and there's interconnectedness, of course, through trade.

23:13But on the flip side, the silver lining is they are exporting deflation to everyone, right? So that is helping on that front. Sorry, I just saw another question I wanted to ask. Trillion Next pointing out that U.S. banks have underperformed Chinese banks in U.S. dollar year to date, but no one's pointing this fact out. Well, thank you, Trillion Next. You just did, which is amazing. But I mean, this is where I think the reliability of what's really going on, not to say that there's not problems with the financial sector here, but you really wonder what's going on with Chinese banks. How could they not be having difficulties, Gio, if the real estate situation is as bad as it is?

23:56Yeah. So I personally don't follow Chinese banks with regard to their performance. But I do want to note that China has been heavily intervening in their own stock market. so if you're wondering why equities haven't gone down more than they have i mean it's getting a lot of help and this is something that china has done a lot in the past and and usually what happens is is that they actually do succeed in in supporting the stock market so the stock market might go sideways and and have trouble going down for a while due to intervention and then suddenly you know, one day maybe they decide to stimulate or maybe the economic numbers start to turn higher and it gets out of the rut and starts to go up on its own accord.

24:51So this is a playbook that they've run many times. And I've seen it enough that I wouldn't want to be on the other side. And right now, there's already a very big difference between expectations for the US economy and the Chinese economy. And we have a slide here that shows the city economic surprise index between the US and China. And you can see that US in blue has been red hot while China has been trading lower. And of course, we know from economic surprises that once weakness or strength gets priced in, then often these lines end up going the other way. So if these two lines start to close the gap where Chinese data starts to outperform and maybe U.S.

25:48data starts to underperform, then that could potentially turn the dollar around. And, you know, a weaker dollar would be good for risk assets. I think that's a really important point, right? You want to get in when the charts look like that. I think it was Vincent Delouard made a similar point. It's like everyone's talking about China like they were talking about the U.S. during the great financial crisis. You can't touch it. Everything's broken. It's terrible. It's like sentiment is just so negative and as tough as it is to look through that, that you kind of want to pay attention. Doug asking, will China's faltering be the trigger to bring down the U.S.

26:30economy? Yeah, that's a good question. And I really don't think so. I don't think China's faltering economy really will affect U.S. that much. We haven't really seen trouble in China affect U.S. stock markets in any meaningful way since 2015, 2016. And even back then, it was kind of overblown. I think the economies are just disjointed enough that it's really hard to have too many spillovers in terms of financial contagion. And over the past two, three years, they've gotten even more bifurcated to the extent that they're actually quite insulated with each other. And historically, actually, the two economies have been completely out of sync.

27:30Like the U.S. has been strong when China's been weak. China's been weak when the U.S. has been strong. So from a global macro perspective, they've provided pretty good counterbalances to each other and prevented large, I guess, extreme moves in risk assets or commodities. So I actually think that this counterbalance actually prevents a lot of excesses in global macro from building up. Yeah. And thankfully so, if they were both on the downslide, we would be in a world of trouble for the global economy if both of those lines were moving lower. It seems like we are sort of at a really important juncture here as we go into the fall.

28:17There's a lot going on and it just seems like China. Boris was asking, do you think the importance of the Chinese economy for global growth will increase or decrease in the foreseeable future? I mean, it sounds like what happens in China is going to be terribly important for the global economy as we move through the fall. Don't you think, Gio? Yeah, absolutely. And it's not just the performance of the Chinese economy that we've been talking about, but it's also the relationship between China and the US, relationship between China and the rest of the world, which could play a huge role down the line.

28:51I actually think that the competition between China and the US is directly resulting in a lot of US government spending, investments in chips, you know, onshoring, nearshoring. I think a lot of it has driven what was in the Inflation Reduction Act. It's this economic and political rivalry that is going to drive a lot of deficit spending of the U.S. And we've seen, you know, how that can affect treasury yields, risk appetite. Absolutely. Heck, we're heading into a presidential election. So one doesn't imagine that's going to change anytime soon. It's everyone's, you know, favorite stumping topic for sure.

29:39Gio, such an important time to catch up with you. We so always appreciate getting the view from Asia, especially at this time when China's going to play such a large role. So thanks so much for being with us. Yeah, thank you. And thanks for all the great questions. Appreciate them. We're going to continue to follow that across the platform. So be sure that you jump in. And if you're a member, we'll try to flag some really good interviews because it's very much on the top of mind of everyone. Thanks. That's it for today. We'll be back the same time tomorrow, as I mentioned, with Tony Greer. So we hope to see you then.