One thing that has not been covered much lately is the panic currently griping China’s investor class. This quote from Bloomberg gives you a feel for the sentiment..

“We need the state to come in like a white knight or we may just lose our jobs,” said one fund manager.

It is not so much that the 6% drop last Monday was all that bad in and of itself as it is that people are starting to give up on the market ever recovering. As Reuters reports….

Stock markets in Hong Kong and in mainland China plunged on Monday, extending a long spell of weakness driven by an exit of foreign investors alarmed by China’s wobbly economy and a lack of stimulus measures. Share prices stabilized somewhat on Tuesday after authorities announced plans to support the market, but analysts were hesitant to cheer.

The small-cap CSI1000 index (.CSI1000I), opens new tab has traded below the 5,000 level this week, after a 6% plunge on Monday to its lowest level in nearly four years.
Market participants said the drop triggered “knock-in” levels on “snowball” products, also known as “auto-callables” in some markets, leading to forced selling of stock futures contracts which further pressured the market.

Although a lot of people are pointing at the “snowball” hedges as being a big part of the current meltdown, that is more of a symptom then a cause. The bigger underlying cause is the continued and still unresolved meltdown in the real estate sector. For example, you will read that China’s government is trying to throw roughly $300 billion at the stock market to support share prices. However, the largest failed real estate company (Evergrande) in China has over $300 billion dollars in debt all by itself. And it is very questionable how much of that money investors will ever get back.

One of the reasons I have not been covering this much is because China lies so much and has done so much to undermine what rule of law there was in China that it is hard to tell what is going on. For example, it is not even clear that the bankruptcy proceedings against Evergrande will be honored in mainland China. If they are not honored, then it will be a long time before we can say what the assets that Evergrande still has are worth. A cynic might be inclined to argue that China does not want that discovery to take place for fear of what it would reveal. But failing to follow through with any kind of price discovery means that the holders of the $300 billion dollars of debt that Evergrande owes are getting nothing. To be fair, the investors in Evergrande are likely to get nothing in any case so from China’s perspective there might not seem to be a lot gained by forcing everything to sell off. On the other hand, if they don’t force a sell off and nobody gives Evergrande more money, all the assets are just going to sit around and rot anyway.

But the real issue hear is not Evergrande itself, but the property market as a whole. 20% to 30% of China’s GDP is based off of investment in the property sector. If Evergrande is representative of the state of the property market in China as a whole (and all sources seem to agree that it is), that sector of the economy is hosed. Even if it was only Evergrande it would be a big deal. To put the 300 billion that Evergrane owes in context, the entire US budget for the US Navy and Marine Corps in 2023 was 231 billion dollars. So even by US standards, $300 billion is a lot of money and that is only one of the failed real estate companies in China (albeit the largest one as far as we know now).

I don’t have time to parse the wider figures in China to see which are trustworthy and which are not. But just by going by the one figure that I think is accurate, China seems to doing very poorly. So poorly that we might be looking at an economic problems on the scale of the Great Depression.

The one set of figures coming out of China that I trust is the figures for the value of goods that China imports. I think this figure is trustworthy because it can be correlated with figures of what other nations have exported to China (normally I would think that China’s export figures are good for the same reason but this year I think they are off due to goods that got held up in China in 2022 due to zero Covid). And if you look at import values, you will see that China’s imports in dollars terms dropped by 5.5 percent in 2023 compared to 2022.

Now on the surface that might not seem so bad but you need to understand that those are not inflation adjusted figures. So a 5.5 percent drop in 2023 compared to 2022 is probably closer to 10% drop in real terms. Moreover, 2022 was not a great year for China. And if you understand that China imports thing primarily to make things, you have to wonder where the 5% growth that they claim to have in 2023 came from if there imports were down in real terms by almost 10%. You have to go all the way to 2020 to find a year where China’s imports were as low as they were in 2023 in nominal dollar (i.e., not adjusting for inflation). And since inflation in US dollar terms from 2020 to 2023 is 17%, I am not at all sure that in real terms China had lower imports in 2020 then 2023.

That is all the insight I can muster on this topic for now. But if I was betting man, I would bet that China’s economic performance will be a much more prominent news topic in 2024.

On a side note, if you want to understand what a mess Evergrande’s liquidation order is going to create, watch/listen to the below.