This podcast episode is from Peter Lewis’ Money Talk. Find here the Substack link.
This August 15, 2023 episode of Peter Lewis’ Money Talk discusses China’s property sector turmoil, with Country Garden, a primary developer, experiencing a sharp decline in shares due to bond trading woes. This setback led to its stock plunging to an all-time low, causing concern in the market.
Tony Nash, Founder of Complete Intelligence, joins the discussion, sharing insights on China’s economic landscape. The experts assess the potential responses of the Chinese government to this crisis and debate the effectiveness of previous measures.
They discuss the challenges of balancing economic stimulus with structural issues, contemplating the risk of currency devaluation. The conversation also touches on global implications, with Tony Nash highlighting the impact on investors and businesses, particularly those in Hong Kong.
The experts shift their focus to inflation and the Federal Reserve’s role. Tony Nash expresses caution, suggesting that although some progress has been made in combating inflation, the Fed might not declare victory yet.
The discussion concludes by speculating on future rate cuts, emphasizing the complexity of timing such decisions amidst solid employment numbers and ongoing economic adjustments.
Transcript
Peter
Let’s start with China’s property sector. Shares of distressed mainland property developer, Country Garden dropped to a new record low in Hong Kong after the trading was haunted in 10 of its onshore bonds. Shares in the group closed over 18% lower at just 80 Hong Kong cents. On Friday, Country Garden, which was formerly China’s largest developer by sales, saw its stock fall below a dollar for the first time since it was listed in Hong Kong back in 2007. The private home builder warned in an exchange filing of a net loss of $6.2 billion to $7.6 billion in the first half. And a week ago, it missed two coupon payments on $500 million of bonds, pushing it towards default unless it pays within a 30-day grace period. On Monday, Country Garden said it’s soliciting some bondholders feedback on a proposal to extend payment of a year-long notes due September the second. Stuart can ask you. I mean, when this property market crisis first started, we saw Evergrand run into trouble. Country Garden was one of those firms that was seen as being one of the stronger developers and immune to some of the problems, but it appears not to be the case, does it?
Peter
Tony, when you look at this from over there, how does it look? I mean, it looks like there’s not really any good options left, are there, for the Chinese governments here to try and sort this out?
Tony
Yeah, that’s the worry, Peter. I mean, look, Stuart gave a very enthusiastic outlook, which I think is great. But I think we have to, as you say, we have to look at the stimulus of the Chinese government or how the Chinese government is going to address it. This is one of those moments that feels again like almost like June 2015, where there could be intervention in the markets and it just falls flat. Then what happens after that and what happens after that and what happens after that? In the same environment where we have a CNY that is devaluing, it could be really not positive. When you’re talking about China exporting deflation, that’s just back to normal for us. We’ve seen China exporting inflation for the past few years, but for 20, 30 years before that, they really exported deflation. It’s overcapacity, deflation, and so on. Are we back into that business-as-usual camp for China, especially with their FDI down and other things? Are they going to have to go back into that old role of deflation exporter to be able to thrive?
Peter
The difference is between now and then, though, is that China, I mean, its exports have been slumping, haven’t they? So maybe it’s not such a strong position as it was back in 2015 to export anything around the world.
Tony
Without a doubt, China is in a very different place demographically. You also have Japan that has a Japanese Yen that is very… It’s not what it was in 2012. In 2012, JPY was at 76 or something. Now it’s at 145 or something. I mean, it’s… You have a central bank in Japan that’s very competitive, and China is having to deal with that. That’s one of the factors that’s coming into the calculation with CNY.
Peter
Tony, what would be your assessment? I mean, the issue in China is there’s plenty of supply, but just a lack of demand through this confidence issue. What do you do? Should the government maybe do what Hong Kong has done, what the US has done in the past, and just go and put more money into consumers’ pockets so that they can spend? Or is it the risk that they would just end up saving that and won’t even spend that either?
Tony
I think they did that in 2011, where they had the cars and other things. They’ve done that before. It was quite successful, but I don’t necessarily think it would have the efficacy that it had 11, 12 years ago. It’s tough, Peter, because there are some real structural issues that are worse. The structural issues were bad in 2011, but they’re worse now. It’s very, very difficult. I think that nobody wants to fix the problem, let’s be honest. Nobody wants to fix the structural problem. Okay, people want to kick the structural problem down the road. We could say this for the US and for the EU as well. That generally is not just a China problem, but China does not want to fix the problems. They just want to push the problems off. They’re going to have to continue to devalue the currency. That’s going to have to happen. They cannot spend more dollars on supporting their currency. They’re going to have to devalue their currency. We’re a few days away from having the weakest currency, weakest CNY since about 2007. This is a major issue for the PBOC, for the import-export authorities, and so on. There are some inevitable that the Chinese authorities are going to have to face, and those are the questions that I try to think about is, okay, they do value CNY, what happens then?
Tony
There’s a lot of US dollar debt that’s serviced from China and from Chinese companies overseas. Things become very, very difficult. So if we think that Country Garden and Evergrande are difficult now, it could become even more difficult as we round out 2023.
Peter
And if the Chinese year-on does devalue further, that’s bad news for investors, isn’t it? Into Chinese markets, it’s bad news for Hong Kong companies because a lot of them here earn their profits on the mainland. It’s bad news all around for the markets here.
Tony
Right, and this is why the PBOC will work very very hard, and the finance ministry will work very very hard to keep the currency around where it is. It’ll be very difficult to strengthen it from here. I think what they’re trying to do is stop it from devaluing more.
Peter
Tell me, what are your thoughts? Do you think the Fed is close to victory now in its battle against inflation?
Tony
I think they’re getting closer. I think if we look at things like Supercore, which is really what… Supercore inflation, which is what… Sorry, Supercore CPI, which is really what I think a lot of the Fed guys are looking at. It did tick higher in July, so I’m not opposing what Will has said, but I do think that we have… I don’t think we’re out of the woods in terms of inflation yet. When we look at where oil prices have come over the past couple of months, and we look at some of the other inflationary aspects of food and other things, it looks like and feels like we will hit a slight bump, say, in September, October. This is something that I’ve talked about with people for quite a long time with one of my colleagues, Albert. Is that a reacceleration, a massive long-term reacceleration? I don’t necessarily think so, but I don’t think the Fed, as Will said, I don’t think the Fed can hoist the mission accomplished flag because the economic response to COVID was crazy in terms of getting more money out into markets. If we look at the growth of money supply in the US, we still have $2.1 trillion in the US economy.
Tony
It’s not just interest rates that are being used to control inflation. We have to look at the money supply and whether or not that supply of money will be reined in through various means. The Fed has a number of tools, and even if we are hitting the numbers, they’re going to continue to tighten over the coming years. Well, say, over the coming 18 months, not just with interest rates, but with quantitative tightening.
Peter
Money supply has been coming down quite rapidly in the US, hasn’t it? Since the beginning of the year. Presumably, there’s still more time, more room for that to work its way through?
Tony
Oh, absolutely. We’re looking at contracting money supply into 2024.
Peter
Tony, in 30 seconds then, can we look forward to rate cuts from the Fed next year?
Tony
Certainly not in the first half. If there are rate cuts next year, it would likely be in the second half because, as Stuart said, employment is still strong and it wouldn’t really make a lot of sense for the Fed to be tightening and loosening at the same time.