After a brief stint with COVID (which was, quite frankly, effing debilitating), I'm 80% recovered.
And I'm literally coming back to this market completely blind, since I was in bed all of last week, isolated from the comings and goings of this mental market we're all looking at.
But at a quick glance, something caught my eye...
Check the chart below.
That's a chart of Chinese unemployment.
And I don't know about you, but I have not been hearing much about this slight change in trend, have you?
Chinese unemployment is up over 50 basis points since the start of 2022, which is pretty severe at a time when the economy is supposed to have been getting back to a level of normality.
Just today, Sunac, the large Chinese property developer was said to have laid of 20-30% of its workforce, and this comes after Tencent and Alibaba have been doing the same...
To the tune of 50,000 workers in total.
That's pretty damn big.
Imagine if Apple were to do this!
The article above states...
These cuts come as Alibaba was already in the process of laying off workers in its consumer services division, which includes food and grocery delivery and mapping.
'Customer services division' layoffs sounds to me like there's an element of subdued demand going on.
How, there's nothing really in the Chinese data around domestic consumption showing a slowdown, whether you look at retail sales or consumer spending.
It's not exactly massively strong, but nothing anomalous.
So this is where we put on our 'second order effects' hats and look down the road a little bit...
Below is Chinese house price growth.
Recently its broken its prior behaviour of having pretty deep troughs and broader pushes higher...
And its just... flattened.
Now I want to explain the link here using data from a research paper that studied the UK...
This finding has macroeconomic implications since it suggests that as the population ages and becomes more concentrated in the old homeowners group, aggregate consumption may become more responsive to house prices.
Now I must explain the context in which I am describing this mechanism in to negate away the differences between the UK and China here...
And make the case for housing affecting consumption even more robust.
In this paper we have used UK micro level data to estimate the response of household consumption to house prices. We have estimated the largest house price elasticity of consumption for older homeowners, and the smallest elasticity, insignificantly different from zero, for younger renters.
So the authors have tried to separate price elasticity of demand into different cohorts by age, essentially saying that younger people are more likely to rent and older people more likely to own.
However, in China in 2017, 70% of millenials owned a home, which is a massive difference to the UK where most do not.
Here then, we can conceptualise that there will be an even greater consumption response since more young people own and are therefore the effects of decreasing house prices will be felt even more across the economy than in the UK - however, older homeowners are likely still going to have the largest response to a downturn in the housing market since some or a lot of their wealth and cashflow is likely to be tied up in it (they aren't working).
But it's the mechanism we care about!
Key to factor in here is that house prices falling is likely going to be due to tighter financial conditions.
Now, it might seem like China is providing liquidity, but is that true in reality?
Not according to CrossborderCapital.
So again, coming back to those second order effects, we could perhaps say that China is in the midst, or coming to, a real slowing of house prices, and potentially, even negative % changes.
Just to provide balance though, some housebuilders hit limit up this morning on increasing month on month data...
But bear in mind timeframes here.
Can this continue?
Especially amidst a rising unemployment backdrop?
These are questions that are too early to answer but I would lean on 'no' being the answer.
What's in store for the Yuan then?
If you want to induce domestic consumption more, then you're gonna want a weaker currency.
That's the base case for me thinking that USDCNH has some legs on it to the upside.
Let's take a look at the chart.
Each time we've dropped down into the 6.20 - 6.35 zone, we've had a nice run to the upside.
I say a nice run...
It's rallied its tits off.
We can insert the above argument for a weaker yuan - they need to stimulate domestic demand perhaps.
But we can also probably take a look at the USD side of things too.
YES, there is data to support USD weakness post the first hike...
But that tends to be over the 90 days following it.
And to be honest, we've hardly seen that weakness come to pass yet with EURUSD currently at 1.0975ish.
Thoughts are then that an 'easier' way for China to stimulate demand domestically without massively changing things is to carry out FX interventions to attempt to weaken the Yuan.
And it could help if moving forward, the USD side of things tightens up - although we've not seen much just yet in funding markets to suggest a flight to USD safety through increased interbank or even non-interbank lending costs.
I currently like the idea of being short the Yuan, but feel we need more information, but this is certainly something to pay attention to, especially with the impulse this month has provided to the pair to the upside off the support.
Let's keep an eye on it, and especially Chinese employment data over the next month or two.