Stay updated on the Chinese economy with our free daily email digest. Each morning, we’ll send you the latest news on the Chinese economy. Our company, Gavekal, provides financial services and is based in Hong Kong. Currently, there are concerns about falling property prices, struggling real estate developers, and a financial conglomerate missing interest payments. These events may remind some of the 2008 crisis.
Some predict that the Chinese economy will face a major collapse due to years of excessive construction, unproductive infrastructure spending, and failed projects. Given the global impact a systemic crisis in China would have, there are calls for Beijing to take stronger measures to revive the economy. However, it’s interesting to note that the market signals do not reflect this pessimistic outlook.
Let’s start by looking at the performance of banks. In most financial crises, bank stocks start declining months before a systemic crisis occurs. However, over the past year, Chinese bank shares have actually gained 2.4% (excluding dividends), outperforming US banks by 12.6% in dollar terms. This is an unusual scenario for an emerging market facing a financial crisis.
Another unprecedented aspect of this situation is the significant outperformance of Chinese government bonds compared to US Treasuries, which are traditionally seen as safe investments. Since January 1, 2020, long-dated Chinese government bonds have returned 17.1%, while long-dated US Treasuries have seen negative returns of 13.4%. This kind of performance difference in the midst of a financial crisis is remarkable.
Some may argue that the Chinese equity markets, government bond moves, and foreign exchange shifts could be influenced by Beijing’s interventions. However, even looking beyond China, commodity prices, like iron-ore, have been increasing. Western companies sensitive to the Chinese market, such as LVMH, Hermès, and Ferrari, have also performed well. Luxury goods producers are even trading close to all-time highs. These trends contradict the narrative of a collapsing Chinese economy.
It’s important to consider the positive aspects of the Chinese economy as well. Macau has seen a surge in tourist arrivals, despite staff shortages in casinos. Domestic tourism is also picking up, and car sales in China have remained positive this year. Alibaba recently reported strong sales growth in its second-quarter results. These indicators suggest that the Chinese economy is not imploding, although it does face challenges and slowing growth.
Overall, there seems to be a significant disconnect between the price behavior of China-related assets and the fears of a systemic crisis. While acknowledging the challenges, it’s essential to carefully assess the situation and not jump to extreme conclusions.
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