SPOTLIGHT CHINA. CRASH COMING? RECOVERY AHEAD?

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CHINA: EMPEROR XI IN CHARGE

China is on the move; it has big plans, and so does the man at its helm, President Xi Jinping. To help facilitate those plans, he has eliminated term limits on the presidency and put himself in a position to serve a third term, during which he hopes to further his goal of achieving "common prosperity." 

That's a goal that Xi's predecessors, in their rush to economic development, failed to reach, while nevertheless setting the stage for China to be not just a major player, but to now boast of being the world's second-largest economy.

However, as reported by the Financial Times on 12 October, Xi now faces some significant challenges, including power shortages and the debt crisis confronting Evergrande, China's second-largest property developer. 

Evergrande has over $300 billion in liabilities. Desperate to avoid bankruptcy, Evergrande has begun to sell off its assets; being forced to sell its vast land holdings could drive down China's currently booming real estate market; see "CHINA’S REAL ESTATE MARKET TEETERS ON EVERGRANDE’S DEBT" (21 Sep 2021).

It's a tangled web. Controlling surging real estate prices, along with reducing income inequality, is part of Xi's "common prosperity" agenda. The FT article quotes "a Chinese government policy adviser," speaking on condition of anonymity, who speculates that "the only viable solution might be to gradually nationalize the whole real estate sector."

Clean Energy? Forget About It!

China's energy issues are also complex. Most of China's electricity still comes from coal. In some provinces, plants have cut production to meet energy efficiency goals, while other provinces have faced rising coal costs, coal shortages and limits on what can be charged for electricity. Factories and businesses have had to ration power, and household outages and blackouts have occurred. 

One government response was to expand coal production and raise the limits on what plants can charge for electricity. These conflicting government energy policies are part of the problem. And factories report having been caught short, with insufficient notice of power cuts. 

TREND FORECAST:  Whatever challenges Xi and China face, minus a wild card event, will prove to be only minor speedbumps to China's advancing position in the world. As Gerald Celente has said, the trend is undeniable: there is an inverse ratio between the decline of America and the rise of China.

This is not a new forecast from Trends Journal; see "CELENTE ON CHINA'S RISE, AMERICA'S DECLINE" (29 Nov 2017). China's economy may suffer a slowdown; it might even be a strategic move, deliberately imposed—see "CHINA'S ECONOMY SLOWING?" (28 Sep 2021)—but it will be temporary. China's economy, and its influence, is still on track to overtake that of the U.S., and while that momentum may slow, it's not likely to stop. 

CHINA’S PRODUCER PRICES RISE AT FASTEST RATE IN 26 YEARS

China’s producer prices—the prices that factories charge wholesalers and other customers for their finished goods—rose 10.7 percent during the 12 months ending 30 September, faster than at any time since November 1995, the National Bureau of Statistics said on 13 October.

Higher prices for commodities, especially coal, raised manufacturing costs, while energy shortages crimped production, Bloomberg reported.

China imported 76 percent more coal in September than a year earlier in an attempt to maintain factory output, according to the Financial Times, although burning coal is at odds with China’s public promises to curb carbon emissions and achieve neutrality by 2060.

Factories tended to absorb the higher costs of materials; as a result, the difference between the producer price index and consumer price index grew to 10 points in September from 8.7 in August, the widest gap since 1993.

Consumer prices rose just 0.7 percent in September, slightly less than in August, the FT noted.

However, with domestic coal prices soaring and the government allowing electricity prices to rise in tandem, manufacturers soon will begin passing on at least some cost increases to consumers, Bloomberg said.

Thirteen of China’s premiere companies have said they will raise prices this year; tire makers are boosting prices this month.

Still, producer prices “won’t stay this high for long,” Sheana Yue, an economist at Capital Economics, told the FT.

“Coal and metal prices are likely to drop as property construction slows,” she predicted.

Because China is the world’s largest manufacturer, higher costs for its factories will pressure global prices. 

However, China’s products tend to make up a small proportion of the goods and services individual countries use to compute inflation rates, which typically include large shares of goods produced in-country.

There is little correlation between changes in China’s consumer price index and movements in the U.S.’s, according to research by Standard Chartered.

China’s producer price index is likely to peak at 12 percent this month or next, yielding a total for the year of 7.5 percent, Zhaopeng Xing, China strategist at Australia & New Zealand Banking Group, told Bloomberg.

Consumer price inflation will rise to 2 percent this quarter and level out to 0.9 percent for the year, Xing said.

Because factories have not yet passed the full impact of cost increases through to consumers, China’s central bank still has room to ease monetary policy and may cut reserve ratio requirements to give the economy more liquidity, analysts said, according to Bloomberg.

TREND FORECAST: Despite business media forecasts for stagflation in China, we disagree. 

It will be growth-flation, since, with their dual circulation policy, China will build internally as well as maintaining a strong export market. Thus, while slowing, there will still be GDP growth with inflation. 

And, as its yuan continues to weaken, Chinese products will be cheaper to buy, thus increasing its export potential.

As for pressure for China to burn less coal and to move toward carbon neutrality, as with most nations across the globe, it’s all about the bottom line and supply and demand. Thus, they will do whatever they need to generate energy at the cheapest price, regardless of its environmental effects. 

CHINA’S OVER-BORROWED PROPERTY INDUSTRY CRACKING

On 11 October, China Evergrande Group, the giant property developer teetering on the edge of default, apparently missed a $148-million interest payment on dollar-denominated bonds, Bloomberg reported, which would be the third such payment Evergrande has failed to deliver in recent weeks. 

Evergrande, which is toting $300 billion in debt, missed its first payment on 30 September, triggering a 30-day grace period. If the interest is not paid by the end of 30 October, the company faces default. (See “China’s Real Estate Market Teeters on Evergrande’s Debt,” 21 Sep 2021.)

Because Evergrande is China’s largest residential property developer, there is fear that its crash could send the country’s construction industry reeling and send shock waves through the rest of the economy.

Also on 11 October, developer Sinic Holdings said it probably will default on some of its bond payments, $250 million of which are due this year.

"Having given careful consideration to its liquidity, the company currently anticipates that it will not have enough financial resources," Sinic stated in a stock exchange filing.

On the same day, Shenzhen-based Fantasia Holdings, which specializes in building luxury apartments, failed to repay $206 million in bonds and developer Modern Land asked lenders to extend its deadline to repay a $250-million bond, saying it had to improve "liquidity and cash flow management and to avoid any potential payment default."

Meanwhile, Country Garden, China’s second-largest developer after Evergrande, reported that Fantasia had failed to repay a $109-million loan. Fantasia told Country Garden “it would probably default on external debts,” Country Garden said in comments quoted by Bloomberg.

China’s wobbly property industry accounts for 29 percent of Chinese banks’ yuan-denominated loans; the real estate industry supports about 30 percent of the country’s GDP, CNN reported.

Real Estate Crash

Playing down potential knock-on economic damage from gargantuan property developer Evergrande’s inability to make debt payments, the Chinese government said Evergrande’s problems are “controllable” and the risk to banks and other financial institutions is minimal.

In the same statement, Zou Lan, chief of financial markets at the People’s Bank of China, scolded Evergrande for expanding and diversifying recklessly, causing its finances and operations to break down, The Wall Street Journal reported.

However, Evergrande’s troubles are individual to it and land and housing prices have remained stable, Zou said, calling those factors signs of a healthy real estate industry.

Evergrande has reported $300 billion in liabilities, including $89 billion in debts.

Accounting giant PricewaterhouseCoopers audited Evergrande’s 2020 accounts and pronounced the company financially sound.

On 14 October, Hong Kong’s Financial Reporting Council said it would investigate whether the audit “complied with applicable accounting standards.”

TREND FORECAST: China’s government will provide financial assistance to Evergrande and other troubled developers as they complete projects now under way. However, as we have been forecasting, China’s unprecedented housing boom was bound to bust. And as we report in this issue, prices have plummeted drastically, threatening a major component of China’s GDP.

TREND FORECAST: Because real estate is as important to China’s domestic economy as manufacturing is to its foreign trade, Beijing will not let developers fail outright, as we had forecast in “Will Evergrande Dive Crash Chinese Markets?” (5 Oct 2021) and was confirmed by Zou’s statement.

As we noted then, and as the Chinese government has now said, regulators will ensure an orderly settlement of the industry’s reckless debts; then the reflexively authoritarian government will impose additional controls that will rein in the romping real estate market, cutting demand for construction materials, bank loans, and other related economic activities.

As a result, China’s GDP will take a minor hit this year and next, and the government controlled country will reduce future risks of a major crash.

CHINA’S HOME SALES TUMBLE, THREATEN BROADER ECONOMIC DAMAGE

Through this month, many of China’s home-building companies have reported year-on-year sales 20 to 30 percent fewer than those last year, showing startling weakness in an industry that has been central to China’s vigorous economic growth through the COVID era.

On 12 October, Longfor Group Holdings and China Resources Land filed reports showing September contracts for new homes down 33 and 24 percent, respectively, compared to a year earlier.

China Vanke, the country’s largest developer ranked by market value, reported 34 percent fewer contracts signed.

Among China’s 100 leading developers, September’s signed contracts were down 36 percent overall, according to CRIC, a Chinese data service.

Developers are now offering discounts, with prices for homes in downtown Foshan reduced by 20 percent since March, real estate agent Huang Jun told The Wall Street Journal.

“Virtually all developers have offered discounts over the last two months,” he said. “Like Evergrande, they must sell more flats” to pay back their loans.

For millions of Chinese families, home ownership is their primary source of wealth.

If home prices fall with demand, those families see their net worth shrink and China’s investment market also contracts, costing the economy jobs, productivity, and reducing local government revenue. 

Sales slackened because Beijing slapped tighter controls on mortgage lending and also because consumers have lost confidence that high-flying developers such as Evergrande would be able to complete construction projects they had started, Morningstar analyst Cheng Wee Tan said to the WSJ. (See related story in this issue.)

Falling sales are likely to force developers to scale back projects, leave some unfinished, and abandon plans for additional units, the WSJ noted.

China already is overbuilt, with as many as 50 “ghost cities” standing empty; put up during China’s construction frenzy in recent years, massive concentrations of apartment blocks were built on a bet that people would find them and move in.

No one did.

The projects were undertaken by local governments as well as private companies, leaving both laden with debt and owning assets with no immediate value. 

If home sales continue to dwindle, “the broader concern is whether some of the tightening measures” the government has placed on lending and construction “come at the expense of the health of the entire sector,” Logan Wright, China research director at Rhodium Group, said in a WSJ interview.

The home-building slowdown has caused Fitch Ratings to cut its outlook for China’s economic expansion this year from 8.4 percent to 8.1, bringing it into line with our long-standing forecast for 8-percent growth in 2021.

TREND FORECAST: While China’s GDP growth is being downgraded, it is still much higher than other major world economies. And last year, while all major nation’s GDP declined, China’s grew by 2.3 percent. 

For millions of Chinese families, home ownership is their primary source of wealth. As home prices and values fall, the economy will see less investment capital, reduced consumer spending, and shrinking revenue for local governments which will in turn soften retail sales.

However, as we continue to note, with its dual circulation policy, China will build its domestic growth by increasing its Made-in-China purchases while also keeping its export business strong as its currency value declines and its products are cheaper to buy. 

CHINA: “BYE-BYE DISNEY” 

As we have been noting, as the United States continues its economic and cultural slide, no longer is it being looked upon by the world as “The Exceptionals.”

And, as the 21st century becomes the Chinese century, the nation will look internally to build not only its economy, but its fashion, sound and style... eschewing much of what they once got from America and Europeans.

Disney, which has made a fortune in the Chinese movie market over the past decade, is dealing with a serious plot twist: Beijing has tightened control over the country's movie industry and wants films made in China to succeed in theaters.

On 27 April 2021, we published a report titled, CHINA: HOLLYWOOD IS DEADWOOD,” which pointed out that Beijing has been investing in producing its own blockbuster movies instead of relying on Hollywood.

The report pointed to some recent Hollywood box office disappointments in China, including Disney’s “Mulan” that cost $200 million to make. The movie was developed with the Chinese audience in mind, and yet only pulled in $40 million. 

The movie perfectly illustrates the politics at play behind these releases. Many say the reasons that the film bombed were because its star Yifei Liu sided with the Hong Kong protesters at the time. That controversy was then eclipsed after it was revealed that part of the movie was filmed in Xinjiang, where at least one million Uighurs are believed to be held in internment camps.

The Wall Street Journal reported that movies made in China carried the weekend on 1 October, including “The Battle at Lake Changiin,” which pulled in $200 million during its debut weekend. 

The Chinese government has traditionally blocked foreign movies from being released in the country on national holidays so it promotes its own, homegrown films. These films are usually focused on nationalism with actors and directors who've vowed loyalty to Beijing. (See “TOP TREND OF 2021: THE RISE OF CHINA” and "CHINA PUTS CHINA FIRST.")

4 Comments
  1. Eagle11 1 month ago

    Hollywood is deadwood indeed.

    No nation in their right mind would subject their people to the cultural rot coming from that California hellhole.

  2. […] developers such as Evergrande and Fantasia are on the brink of collapse, as we documented in “Spotlight China: Crash Coming? Recovery Ahead?” (19 Oct […]

  3. […] a fact underscored by the ongoing debt crisis among building companies, which we reported in “Spotlight China. Crash Coming? Recovery Ahead?” (19 Oct […]

  4. […] of 56.9, despite the widely reported troubles of Evergrande, Fantasia, and other large developers (“Spotlight China. Crash Coming? Recovery Ahead?” 19 Oct […]

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