As Evercore ISI (correctly) puts it, “no one can remember more than 7 bullets on anything.” So for those eager to catch up on all the latest news out of China, here are just 7 bullet points:
- Incoming Jan-Feb data still choppy. Our view; no immediate hard landing, but no economic takeoff either. Data review below.
- Our Synthetic Growth Index (SGI) likely down for Jan and Feb, after up Sep-Dec. Looking overseas and in China, we see more downside risk than upside surprise.
- As China slows, no problem is too small for a new policy fix. Here, four key items the NPC addressed. Sadly, Beijing’s actions all look like patches, not like fixes.
- Housing: too many vacant units, in the wrong places, wrong size and wrong price. Some cities big speculation, others still dead. SOEs buying doesn’t help.
- SOEs: excess capacity, old, inefficient in most key China industries. How to fix? Who would hire a 30-year veteran steel worker?
- Equities: recent rally welcome but markets still broken just when more equity financing is needed. Beijing focus – just avoiding a new price collapse.
- NPLs: from past bad decisions, rising sharply. NPLs converted into ABS won’t help much. NPLs converted into equities, even less. No winners here.
Curious for more: here are the details:
Overview. The last two weeks of NPC announcements and positive talk just don’t fit with what we see. Jan and Fed data are not sparkling. We still pick up mostly negative anecdotes. Our Jan and Feb SGI likely will be lower.
Beijing has been on the protect growth track for a year. But the rest of the world is not cooperating. Global growth numbers are not improving. Every added monetary easing move (real or promised) in the developed world makes us more nervous, not more comfortable.
China has big structural problems that are weighing it down. The understandable reaction is another Beijing fix. Every governmental minister got a hearing at the NPC – conditions, prospects, policy ideas – plus the obligatory cheerleading – this will happen; that bad won’t happen.’ It’s the next steps that leave us cold.
Here, briefly, four big problem areas that Beijing is trying to address. (Note. Ask us for more detail).
First problem, Housing. Housing is just out of equilibrium. Too many units have been built (in order to create demand and jobs), in the wrong places and available at too-high prices. There is renewed speculation in Tier 1 cities. Some buyers borrow to borrow — borrowing money for the down payment, in order to get a mortgage. Not healthy. Excess supply dominates in Tiers 3 and 4. One fix — having SOEs buy these surplus units. This does not fill them up, it just changes the owner. A mortgage interest deduction launch would only benefit the top sliver of the income distribution. New construction won’t rise until the supply surplus has been resolved, no earlier than 2017. Someone is going to get hurt here.
Second problem, SOEs. The industrial SOEs are out of equilibrium. Capacity is widely excessive. If these SOEs keep producing where there is no demand, nothing changes. Stopping production while supporting these excess workers or finding them new jobs is the start. Announced capacity cuts (by MIIT, for years) have not materialized. Beijing is talking of cutting 1.3 mln workers out in Coal and 0.5 mln in Steel. Coal and steel are just a start. (Lay off and find a new job is called ‘resettlement’). No time period given. There need to be probably 20% job cuts in a wide range of China industry (from mining to mfg). It’s going to take a long time with a lot of adjustments. Retraining these workers will be beyond hard. And expensive. There is no pain-free fix.
Third problem, Equities. Equities are out of equilibrium. And the new CSRC has promised they would intervene “decisively” if prices fell sharply again, as in June 2015. So this is a promise of ongoing (or at least recurring) disequilibrium and intervention – state buying when market forces are pushing prices down more than Beijing can stomach. A well functioning equity market is part of the solution in China, especially as debt mounts. And as China counts on “innovation” as a new growth driver, but with the heavy hand of Beijing. Be skeptical. The IPO system does not work. The structural fixes are absent.
Fourth problem, NPLs. Banking in China is out of equilibrium. The NPLs are mounting. (Note. Ask us about our stress tests). Loans to failing companies won’t evaporate. They can’t be freely packaged into an ABS that looks good because there is safety in numbers (remember 2007-08). Converting these loans that are failing into equity is not a realistic option. Who wants this equity? We’ve heard no details. The officials could make rule and law changes to facilitate this, but what’s the use if it makes no sense. Total (public and private) debt in China rose about 10% in 2015 (our estimate), and another 10+% in 2016 is coming. The machinery just is not yet in place to make market forces dominate in China finance. What’s the hurry.
Quick Comments.
- Tobin Tax. Briefly discussed, we think it goes nowhere (in this case, on forex transactions). Even going thru the exercise and setting at a zero rate we believe is unlikely, and would be unwise.
- Shenzhen-Hong Kong Stock Connect. Beijing says yes in 2016; we think likely unless new equity turmoil erupts. Yes a plus to SZ (northbound trading) as HK investors have not had access to SZ to date. Note, essentially all SZ investors already had HK (southbound) access.
- Shanghai SEB (Strategic Emerging Board). China has said, this shelved for at least 2016. Would have created a new competitor (for listing ‘growthy’ stocks) to ChiNext (part of SZ).
- CSRC priorities. New head, Mr. LI Shiyu, most recently from Ag Bank. We believe 2016 focus will be on trying to find and punish violators (‘malicious shorting’ – whatever that is) and avoiding another market collapse as in Jun 2015).
- New margin lending. After close Friday, China Securities Finance will resume loans to brokers for margin lending, and cut interest rates. Was halted in 2015 in market upheaval. Margin lending last year fell about 60% from its peak.
- President Xi’s ‘Four Comprehensives.’ New slogan – every Party leader seems to want a slogan. They are 1) promoting prosperity, 2) deepening reform, 3) strengthening the rule of law, and 4) stressing Party discipline. You be the judge.
- Outbound M & A. Latest, Anbang Insurance-Starwood. We do not think CFIUS will block it. Only grounds are “national security” -defined by POTUS. Blocking it would send a ‘the US is not open for business’ signal. Also, Zoomlion-Terex, will not be blocked in our view.
- Oscar’s China Sales Survey. ([email protected]). Most recently at 34, weaker than in 2009 at 36. Survey has a heavy ‘old China’ weighting. Easy to conclude that ‘old China’ is weaker now than it was in the 2008-09 global meltdown.
- Currency basket. Most market participants continue to talk yuan ‘up’ or ‘down’ with reference to the USD. That mindset needs to change. Beijing has been explicit that they are thinking (and behaving) currency ‘basket.’ In the basket China is thinking about (not mechanical), the USD is #1. EUR and JPY runners-up. Make your own call on these cross-rates, but we would not bet against this ranking for overall economic health in the coming years.
- Macau. Rounding error at the NPC, but rules are being relaxed to allow more individual visitors (tour group not required) from added mainland cities. This is a gaming industry plus. Mass market is becoming more important versus high-end.
- 315 Consumer. New practice, every March 15, a CCTV channel devotes an evening to exposes of unfair practices in the consumer sector (so called ‘Name and Shame’). This year it was much less focused on bad behavior by foreign brands.
- PBoC cut. PBoC cut rates 25 bps on MLF (Medium Term Lending Facility) loans to member banks for 3m, 3m and 12 m loans. This is a small item, but it is an item.
Source: Evercore ISI
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