China's economic model is no longer working - relied on property growth

So now the question is how will they fix it?

First, lets talk about the problems

China's 4 main problems according to Odd Lots

• demand, debt, demographics and decoupling
  • Demand - they don't have any. the household consumption component of demand is really low, especially relative to other countries. At the OECD level, it's about 60% of GDP, whereas in China it’s 40%.
    • There has been a decline in household income growth and there has also been household balance sheet deterioration. And a lot of these comes down to housing market property value depreciation because of control (a big issue in China) real estate policies and all and all that.
    • They don't really want to help out their people. In other words, the Chinese Communist Party has always been at the center of a capital allocation. And by empowering the household, or for that matter, the private sector, it basically dilutes or potentially removes their relevancy.
  • Demographics - As of last year, Chinese population growth for the first time declined. And there are some numbers saying that actually now India's population is more than China’s population.
    • Even if the government gives stimulus checks to the Chinese household in the current mix of policy environment, I would not necessarily be confident that the Chinese households are going to A) be incentivized to spend or B) think that this as a good time to buy a house. And there are two reasons. The first reason is negative confidence shock, and the second is a deflationary policy environment.
    • The we will be the last generation story
    • China's fertility rate drops to a record low 1.09 in 2022.
  • Decoupling - But decoupling really, I understand it from the perspective of supply chain diversification. The idea is really not about getting rid of China, simply because China is on every part of your supply chain. How could you possibly get rid of China? Right? But it's really about not being overly reliant on your one simple supplier
  • Debt: Brad Setser had a great piece of research about the possibility that maybe China has an additional $3 trillion, I think it was, worth of assets that aren't necessarily accounted for in official statistics.
• All of china's problems: Retail sales are coming in extremely weak. So rising less than 3% a year. They used to be in double digits. We have deflation setting in, which is something we spoke about on the episode we did with Richard Koo. Manufacturing is contracting. Exports are falling ( export as a percentage of GDP was about 30% and has since then plateaued and the decreased. Right now it’s about 20 something percent.), the yuan is dropping against the dollar. Bank loans at a 14 year low last month
  • China was supposed to be inflationary: if you compare it with all the excitement from earlier in the year about China reopening the end of Covid Zero, there was this expectation that China was going to end up being a positive catalyst for global growth this year.

The consumer is struggling

• household income growth + balance sheets are deteriorating
• China dont want to empower the household (provide support) because it diminshes the need for the PBOC and therefore the chinese government

Of course one could also say - China is still gambling: I've talked about the Macau (ma-cao) numbers consistently rebounding, the recent news allowing more group tours internationally and today Inside Asian Gaming had a story overnight, "Return of Chinese travelers boosts international passenger numbers at Sydney Airport to 89% of pre-Covid levels.”

• The impressive growth in international passenger movements was attributed to a surge in passengers from China, with July also the first month since 2019 that Chinese passengers have ranked as the number one source of foreign visitors. While Sydney Airport didn't reveal exact passenger numbers by country, it said arrivals from China had now recovered to 76% of 2019 levels, up from 69%

But really the problem is the property sector. I talked about evergrande a lot in 2021 and it's just all interconnected

• PROPERTY SECTOR: Most of the massive amount of debt (and I don't want to minimize their huge challenges) and trouble in China's economy is with residential real estate developers and local government financing vehicles, along with some local governments
• Consumer okay: but most have a lot of equity in their homes, have put down large downpayments and savings rates exceed 30%

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