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Editor's Note: Below is an excerpt from our Market Edges weekly newsletter, sent to subscribers every Monday. |
Beijing's got a (big) problem.
Right now, China is stuck between a wall and a hard place. The Chinese Communist Party (CCP) and People's Bank of China (PBoC) are attempting to 1) support their financial system while 2) essentially halting their economy in a string of draconian COVID-19 lockdowns.
Economic data out of China (which should always be taken with a couple grains of salt) is looking rough across the board. Here's the latest Growth & Job prints from the weekend:
- Chinese GDP rose to +4.8% YoY, up from 4.0% and in line with expectations (we call bullsh*t)
- Beijing is targeting to grow at 5.5% YoY, which would be a noteworthy slowdown from 2021's +8.1%.
- China Retail Sales fell to -3.5% YoY, versus the prior +6.7%, the first decline since July 2020.
- Led by deep declines in cosmetics, garments, and jewelry, the outlook is even gloomier from here as the hardest base effects come in April.
- China Industrial Production fell to +5% YoY, down from +7.5%. Tough base effects continue into April as well.
- China's Jobless Rate hit 5.8%, the highest since May 2020.
- For young adults (ages 16-24), unemployment hit 16%, the highest in 18 months.
Why do we call bullsh*t?
First of all, GDP is obviously a big headline number which China has obsessed over since Deng Xiaoping jumpstarted China's economic growth charge. Secondly China's manufacturing data has been lackluster (to say the least).
Hedgeye Director of Research Daryl Jones broke down China PMI data in a recent Early Look note:
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"In the Chart of the Day, we look at the China Composite PMI going back ten years. In contrast to the GDP report, it shows an economy that has floated near the contraction line of 50 for most of Q1 and been slowing for 18 months. No matter how you slice it, slowing Chinese economic activity is not good for global growth." |
Not great. What's less great, is that China is locking down roughly a quarter of its population (including all of Shanghai)... representing 40% OF ITS GDP.
Let that sink in for a minute.
We wish China all the luck in the world maintaining their economic growth while shutting down their economy. Some 'analysts' have been pointing to rolling over/declining shipping rates out of Shanghai... well, you may struggle to get ships out of your largest port when the associated metropolitan area is at a standstill.
What do you do when your economy is slowing (or you have a massive real estate debt bubble hanging over your head)? You ease financial conditions.
The PBoC just cut Chinese banks' reserve requirement ratio (RRR) by 25 bps, injecting roughly $83 billion into the economy. On top of the RRR cut, Chinese regulators are 'encouraging' banks to lower their deposit rates... and on top of THAT, China M2 Money Supply accelerated to +9.7% YoY in March, up from the previous 9.2%.
Is that enough to buoy their economy/markets? Apparently not.
Here's an excerpt from one of Hedgeye CEO Keith McCullough's recent Early Look notes:
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"I’m not buying Chinese Stocks either. Both the #VASP and Quads have been signaling SELL China now for more than 16 months. The Shanghai Composite Index was down another -1.3% last week and remains Bearish on both my TRADE and TREND durations." |
Incidentally, our Risk-Manager-in-Chief also discussed China, from both a geopolitical & economic POV, with hedge fund manager Kyle Bass during the Hedgeye Investing Summit last week. We highly recommend you watch the full interview (if you didn't catch it live) here.
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"I'm shocked at how much capital is invested in a regime like the Chinese Communist Party. I don't think anyone should be invested in China. You're engaging in a fool's errand; I don't think you'll ever get your money back if you're invested in Chinese Private Equity" "I think a Taiwan invasion by China is inevitable." - Kyle Bass |
We'll keep you updated on the path of China's economy going forward, especially as they (incrementally) reopen the country and demand gets some tailwinds.
