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The writer is the CEO of Gavecall, a Hong Kong-based financial services company
Real estate prices are falling. Major real estate developers have fallen into disrepair. A large financial group defaulted on paying interest on products sold to investors. For many investors, such recent events in the country look like a remake of a 2008 movie that few enjoyed.
The most bleak of these predicts the collapse of the Chinese economy with years of overbuilding, white elephant projects, and unproductive infrastructure spending finally coming home.
As the overall crisis in China would reverberate around the world, this raised alarm and prompted calls for Beijing to intervene more aggressively to revive the Chinese economy. But the strange thing is that such pessimism is not reflected in what the market is indicating.
Let me start with the performance of the banks. In most financial crises, the performance of bank stock prices begins to point to problems months before the onset of a systemic crisis.
For example, the Standard & Poor’s 1500 Composite Index fell 66 per cent from January 2007 to July 15, 2008 before the collapse of Lehman Brothers in September of that year. Likewise, European banks, according to the MSCI EMU Banking Index, fell by 35.4 per cent between January 1, 2010 and August 1, 2011 — before sovereign bond yields in the eurozone’s periphery began to explode. , which unleashed the euro crisis.
With this in mind, over the past 12 months, Chinese bank stocks (as measured by the FTSE China A-Share Banking Index) have risen 2.4 per cent (not counting dividends). This means that Chinese banks actually outperformed US banks during that period by 12.6 percent in terms of dollar value. What, then, can we call a systemic financial crisis in emerging markets, where local banks are rising year-round, outperforming US banks by more than ten per cent? There are actually only two possible answers: either unprecedented or non-existent.
And here’s something else unprecedented in the emerging market financial crisis: the massive outperformance of Chinese government bonds relative to US Treasury bonds, which are a traditional safe-haven investment.
Until the 2019 coronavirus lockdowns, yields on Chinese government bonds and US Treasuries were roughly the same in any meaningful time frame. But it is clear that Covid saw very different policy choices implemented in both China (longer lockdowns) and the US (intense fiscal stimulus and expansion of the central bank’s balance sheet).
As a result, since January 1, 2020, long-term Chinese government bonds (measured by BAC indexes) have returned 17.1 per cent, while long-term US Treasury bonds have yielded negative returns of 13.4 per cent. Returning to our question above: What can we call a systemic financial crisis in emerging markets, where local government bonds outperform US Treasury bonds by more than 30 percentage points in less than three years? unprecedented, or non-existent.
Of course, one might choose to ignore the messages coming from the Chinese stock markets (which, while disappointing this year, have not yet cleared the lows of October 31, 2022), moves in government bonds or even foreign exchange changes with the move Hand. Beijing on prices can easily distort signals.
But if we look beyond China, we still have rising commodity prices. For example, iron ore, which is perhaps the most sensitive to China of all commodities, is up 50 percent from its lows on October 31, 2022, and has actually been surging over the past few weeks even as negativity on the Chinese economy has magnified.
The past year also saw stock prices of China-sensitive Western companies, such as LVMH, Hermes, Ferrari and others, perform particularly well. In fact, most luxury goods producers are trading at or near all-time highs. This may seem counterintuitive if China is indeed facing total collapse.
The rampant negativity also ignores some important bright spots in the Chinese economy. For example, the number of tourist arrivals in Macau has recently increased to normal levels, despite severe staff shortages in all major casinos. Domestic tourism is booming on a large scale. China’s auto sales remain high this year despite a slight decline in June and July. Alibaba just reported a return to strong sales growth in its second quarter results. However, there are more signs that the economy is not collapsing.
This does not mean that we deny that China’s economy is facing real challenges, or that Chinese economic growth is slowing down, whether on a cyclical or structural level. But in short, there appears to be a strong disconnect between the price behavior of most Chinese-related assets, both at home and abroad, and fears of a systemic crisis.