At the moment there is rather a public spat between China and Japan. In one sense this is sabre rattling by the new Sanae Takaichi administration which knows it will be popular with its core vote. But it brings to mind a different challenge between these two countries and let me illustrate by returning to my theme of last Wednesday which was Japanese interest-rates.
Japan’s 10–year government bond yield rose to 1.72%, reaching a peak not seen since June 2008. ( @FirstSquawk)
As you can see Japanese government bond yields keep rising posing all sorts of questions as for example the proposed stimulus package gets ever more expensive and the position of The Tokyo Whale ever worse. But we can also compare it to China where its own ten-year yield is 1.81% so they are getting close. This has been a policy there as I looked at on September 24th last year.
CHINA 10-YEAR BOND YIELD FALLS TO 2%, FIRST TIME ON RECORD ( Investing.com)
It is increasingly looking like there will be a crossover but we can see that China has a touch of The Vapors.
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Returning to the present spat it has been having an impact on areas which already are a concern.
Chinese travel platform Trip.com was down nearly 5 per cent, while airline stocks listed in Shanghai were also hit, with Spring Airlines falling more than 4.5 per cent, Air China losing 0.2 per cent, and Southern Airlines dipping 0.5 per cent. Hong Kong shares were also down. ( Financial Times)
So both China offsetting the deflation it exports and on its own consumption and the latter is making some news there.
Consumption problems
For newer readers the story is that China tried to boost domestic consumption by aping us Western Capitalist Imperialists and having a house price boom. But for several years now we have seen stagnation and bust in this area so in fact now reducing consumption.
The South China Morning Post gas interviewed the economist Lu Feng and it is interesting how far back he looks.
Actually, this issue has been there for a long time. It should be said that since [former Chinese premier] Zhu Rongji’s era [1998-2003], both domestic academic circles and international observers have recognised that China’s consumption is relatively weak. However, in recent years, this problem has become particularly pronounced.
He does on to explain why he thinks the situation has developed in this way.
Indeed, consumption growth has been relatively slow, and there are a series of structural reasons behind this, including weakened public confidence after the Covid-19 pandemic. I think perhaps more importantly, income distribution, our social security system and the hukou [household registration] system all reflect what we might call a dual economy: while some groups have benefited, it must be said that the degree of inclusiveness is insufficient, which has led to the relatively low consumption of other groups.
As you can see he has looked at this in terms of the strategy of the Chinese economy and prefers to blame Covid rather than the house price falls. That is no doubt wise if you work at Peking University. But he does offer a plan for a way out of this.
Peking University professor says China’s next five-year plan could provide the necessary momentum to shift more public resources to households.
House Price Bust
As you can see the situation continues to develop.
In October, prices in China’s four top-tier cities — Beijing, Shanghai, Guangzhou and Shenzhen — fell an average of 0.9% from the previous month, according to data released Friday by the National Bureau of Statistics (NBS). Beijing led the downturn with a 1.1% drop. Prices in 31 second-tier cities slid 0.6% on average, while those in 35 third-tier cities declined by 0.7%. ( Caixin)
Indeed it is getting worse.
For the first time since record-keeping began in 2011, secondhand home prices fell across all 70 of China’s major cities for two consecutive months — a sweeping downturn that underscores the persistent strain in the country’s property market and the failure of the traditional “Silver October” sales season — a typically robust period for real estate — to deliver. ( Caixin)
The reason I described this as developing rather than deteriorating is that first-time buyers in China are seeing some cheaper prices. But the deteriorating element here is on the larger number of existing home owners observing this.
Average resale prices in top-tier cities continued to set new lows. In Beijing, pre-owned homes averaged 55,844 yuan ($7,840) per square meter in October, down 11% from a year earlier, according to real estate portal Jiwu.com. In Shanghai, the average fell to 53,033 yuan per square meter, a 13% decline over the same period. ( Caixin)
Caixin then rather rams the point home.
The secondhand market is widely viewed as a more accurate gauge of housing demand than the new-home market, where official price caps can distort data. The continued fall in both prices and transactions underscores the depth of the property downturn and suggests government support measures have yet to rebuild buyer confidence.
The banks are struggling
The house price falls will be impacting the balance sheets of the Chinese banks and when you combine that with central planning we find ourselves observing Goodhart’s Law.
Jerry Hu, who owns an auto-parts firm in eastern China, was approached in October with a strange request. A loan officer from one of the country’s biggest banks asked him to borrow 5 million yuan ($700,000), deposit the money and repay it next month. The bank even agreed to cover the interest. ( Bloomberg)
Back in the day my home country the UK had what became called “liar loans” whereas China has moved on this.
Known as “quick-lend-and-recover,” the practice is spreading as banks come under unprecedented pressure to hit government-set targets that can’t be met by real demand, according to interviews with almost two dozen bankers. ( Bloomberg)
This is where we see Goodhart’s Law as the target may be achieved but the point of it vanishes. This poses all sorts off questions for the money supply data for starters.
While targets vary from bank to bank, they have been told to lend at least as much as last year, said the bankers, who asked not to be named discussing private directives.
Which then leads into the wider economy.
The loans underscore a major challenge facing policymakers as China’s economy slows: They can make funds cheaper and more abundant, but they can’t force people to borrow, spend or invest.
We are back at cheaper interest-rates which I expect them to persist with. Thus we could easily see Chinese bond yields head below and more importantly stay below Japanese ones. Although that may be a moving target as it must be tempting for Japan to return to its old ways.
Comment
Over the time I have been writing and posting here we have seen changes in what were considered certainties of economic thought. Let me start with export-led growth which was considered an untouchable part of economics 101. But the credit crunch era brought consumption problems for the exporters ( China, Germany and Japan) and we see for China the house price boom helped for a while but now things have been made worse by the bust.
This means that China tries ever harder to export to offset its consumption shortfall. That will cause more friction with trading partners.There is little or no inflation according to the official figures. What do we need next to repeat The Lost Decade? Falling real wages…..
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