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The Chinese economic slowdown is happening. It's partly the result of a massive People's Bank of China stimulus program that's now waning. And now the air has been coming out of China's manufacturing sector and the overinflated property market. According to the Financial Times:
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"Investors in the Chinese real estate sector know that they are making a risky bet. Their nervousness becomes apparent every time the government intervenes in the property market. They should worry about more than just state interference. On Monday, shares in Evergrande, the developer, (and those of rival Sunac) dropped 8 per cent after eight large provincial cities announced plans to stem speculation by restricting apartment sales in the secondary market within a few years of purchase. Yet secondary sales are a secondary concern for the likes of Evergrande. Other steps by the government have had more effect. Sharp price increases in the past three years have been concentrated in a small number of top cities. Mortgage lending restrictions have been introduced in those areas." |
Here's the key chart. As you can see below, the average home price in first tier and second tier Chinese cities has been falling.
There's a reason for the slowdown in China
In 2017, the People’s Bank of China has pulled stimulus back significantly. PBoC Open Market Operations are down -246% year-over-year in 2017 versus an increase of +689% year-over-year by this time last year, writes Senior Macro analyst Darius Dale. For the full year of 2016, the PBoC pumped a staggering net 1.727 trillion Chinese yuan into mainland financial markets.
More macro insight from Dale...
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"Recent data confirms our view that the Chinese economy is in the early stages of what we believe to be a moderate, but impactful deceleration through at least YE ’17. In the context of “Old China” now growing at an unsustainable rate post the 2016 stimulus package and property price appreciation running double the growth rate of disposable personal incomes, we see little coming down the pike that could shake our conviction in this view." |
Bottom Line
All told, we reiterate our bearish bias on the “Old China” economy with respect to the intermediate term and suspect that the nascent deceleration highlighted by the Q2 GDP data will morph into a full-blown negative trend over the next few months.
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