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Lots of big, ugly numbers coming out of China this week. The economy's looking shaky, and the property market is still correcting. But is any of this new news?

China's 'Lehman Moment' was supposedly in September 2021. But the comparisons to Lehman were always wide of the mark. A moment that 'shocked the world' vs a moment when the world collectively said "about fkn time".

It was a big event for China though. Evergrande was the poster child for China's real estate bubble. Analysts still say the real estate sector accounts for one quarter of China's economic activity. That used to be true. It's probably far less at this point.

We wrote about Evergrande from 2019 and really dug into the numbers of the broader property market in March 2021 👇

What’s up with China’s property market?
Evergrande, the real estate darling of China. At first glance, it appears like a straight-A student. However, it would take a prudent investor just five minutes of legwork to reveal that this company is, in fact, a troubled child.

Evergrande had delayed the publishing of their 2021 & 2022 accounts until this week, when losses of $66.36 billion & $14.76 billion were revealed. $81 billion of losses across the two years.

And those are the declared figures...

...auditor, Prism Hong Kong and Shanghai Limited, however said in the report it does not express an opinion on Evergrande's financial statements, because it has not been able to obtain sufficient appropriate audit evidence to provide a basis.

The end of the real estate boom is one of many factors weighing on the economy. The property market continues to slow. Per Reuters 👇

  • Property sales by floor area declined 28.1% year-on-year, extending a 19.7% fall in May
  • For June, property investment totaled to 1.2849 trillion yuan, falling 20.6% from a year earlier after a 21.5% drop in May
  • Prices were flat after rising in May in tier-one cities including Beijing and tier-two cities.

So, sales volumes are down and prices are down. Not a healthy combination...

China's central bank will give developers an extra 12 months to repay loans due this year, but none of this is especially stimulative. A patchwork of extend and pretend does nothing to repair broken confidence.

The confidence crisis is spreading beyond the property market too, and the tale of the economic growth engine that suddenly stalled bears many similarities to the post-2008 situation in Spain... 👇

Does nobody Xi the real risk?
About China, not Evergrande... 👇 Falling property values don’t square with Xi’s grand plan to boost middle-class consumers…

Likewise, the 'support measures' and refinancing is reminiscent of Spain's 'bad bank' that was formed in 2012. Not in structure, but the general idea is the same.

Pass the unrealised losses onto a larger (state-backed) balance sheet.

Anyhow, if you've been reading Macrodesiac for a while, you'll know that China's economic struggles have come as no surprise.  

Now, we're looking ahead to the Politburo meeting... 👇

China’s Stock Market Rally Is (Finally) Imminent (Again)
First it was the economic reopening, then the restructuring of the economy, now it’s ‘just because’. Time for China’s stock market to finally rally?

That should take place around the 28th of July, and it's all eyes on stimulus, and the form it takes.

Further easing of property measures is anticipated, but it's the demand side of the economy that's the key focus, with stimulus expected to be targeted rather than flood-like.

Ahead of the meeting, China's State Council has issued guidelines for the promotion of the private economy (Newsquawk) 👇

  • Increase support for private economic policies;
  • Vows to boost private economy and protect businesses
  • Continue to break down barriers to market access.
  • Improve market-oriented reorganisation plan and encourage enterprises to revitalise assets and recover funds.
  • Will set up traffic lights for capital and improve the rules of capital behaviour systems.
  • Will support share listings and bond sales of private firms.
  • Will support private enterprises in expanding overseas business and participating in overseas projects in an orderly manner.

The usual non-committal word soups (also known as 'politics'), but another sign that China is gearing up to take action.

Expectations of support are quite low, as are most of the Chinese indices. Take the A50 Index for example.

Down 40% from the February 2021 high

It's hard to say that stimulus is priced in when China's stock markets are still looking so glum, with conservative stimulus expectations... 👇

"We are conservative about the extent of the policy support down the road,"
"Fiscal policies may not be easily implemented, given the already high public debt and the reduced efficiency of these policies"
Alicia Garcia Herrero, chief economist, Asia Pacific at Natixis

Alicia's absolutely right to have these doubts in my view. There's a long road ahead for China's economy. But there's no real bet to make there. That's old news.

Maybe the stimulus underwhelms and there's nothing to be done here, but it's worth keeping a very close eye on...

Markets are constantly in a state of uncertainty and flux.
Money is made by discounting the obvious and betting on the unexpected ~ George Soros