Hedge Clippings | 18 August 2023
Chinese property dominoes are looking wobbly
All is not well with the Chinese property market - and given its importance to the overall Chinese economy, and thus to our major trading partner, there are some worrying signs on the horizon. Domestically, the property sector has been a major driver of China's growth, and thus the overall economy. And for a snapshot of the importance of China's economy on global trade, China is 1st in the world by maritime trade volume, 2nd in the world by shipping capacity, 1st in the world by port foreign trade volume and container throughput, and 1st in the world in shipbuilding by completed gross tonnage.
Back to the property sector itself, and the empty or partially completed high rise buildings mean that the worrying horizon is not too far away.
In the past week, two of China's most visible property developers' problems have hit the headlines for all the wrong reasons. Country Garden, the largest privately owned development company in China suspended interest repayments on a small number of on-shore bonds, and Beijing-backed developer Sino-Ocean conceded it had missed almost USD 21m of interest repayments on a series of off-shore bonds. As a result, Moody cut Country Garde's rating from B1 to Caa1, and Country Garden shares fell 18% in one day in Hong Kong.
Country Garden sales in H1 2003 are down 30% YoY, and according to John Browning's excellent "Letter from Shanghai" the reluctance of buyers to place large deposits - which are then used to complete projects - is causing the developers' liquidity and cash flow problems. The problems in the property sector don't end there, as Browning explains: "The market is looking at the maelstrom that circulates around Zhongrong International Trust, and its connected parent Zhongzhi Enterprise Group. Zhongzhi acts to pool the deposits of its clients to invest in real estate, equities, bonds, and commodities. The guaranteed rates offered investors head towards 8%. Zhongrong International Trust has 270 products, which in totality offer an average yield of 6.88%. Coupled with a sales team that reportedly received 2-3% of the initial deposit, if we then throw in management fees, the investment managers of these pools would have to find investment opportunities that earn in the area of 12% P.A. just to break even after costs."
As Browning rather drily notes: Looking at it dispassionately, there would be at first glance a temptation to manage the pool according to the Book of Madoff.
Elsewhere in China retail sales figures disappointed, with July YoY coming in at 2.5% vs. previous 3.1% and expected 4.5%, followed by Industrial Production, July YoY actual 3.7% against previous 4.4% and expectations of 4.4%. Hedge Clippings has always been wary of Chinese data being shall we say "massaged", but our concerns were not helped (or were possibly confirmed) by a report that the numbers will no longer be published for the Chinese Youth Unemployment Rate - those unemployed between the ages of 16 and 24 - which is running at 21.3%. The official reason for the non-publication was the need to "further improve and optimise labour force survey statistics." Obviously not publishing bad news won't solve the problem, but it will save having to explain it (except to those unemployed). Maybe the unemployed youth could be conscripted and used to invade Taiwan?
The Chinese authorities will no doubt act to revive their slowing economy, but longer term the social and demographic issues they face (population growth fell by 0.2% in 2023, having flatlined in 2022 in spite of the end of the One Child policy) are significant. According to this report, the UN forecasts that China's population will decline from 1.426 billion this year to 1.313 billion by 2050 and below 800 million by 2100.
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