IN-DEPTH: TRANSCRIPTION - UnderTheLens - 05-24-23 – JUNE – Will China Save US From a Hard Landing?


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Thank you for joining me. I'm Gord Long. 

A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY. 

Always consult a professional financial advisor before making any investment decisions. 


We haven’t had a chance to talk China in awhile and the Post-Covid Chinese Lockdown developments occurring in China now merit it.

Unresolved and overdue structural problems primarily centered on labor are now coming to the forefront. These are problem seldom currently mentioned outside China, but I will speculate will be common media narrative talking points in six months.


As such I would like to cover the items highlighted here.


Our long time readers are certainly well aware of the importance that we at place on the Chinese Credit Impulse.  Though it works with an approximate 12 month lack it has signaled on four separate occasions over the last decade and a half that it would insert sufficient liquidity into the global system which would help resolve major issues at the time.

  1. The 2008 Financial Crisis
  2. The 2011-12 EU Banking Crisis
  3. The 2014-15 “Taper” Turmoil, and
  4. The 2020 Covid-19 Shock.

The question we need to answer is whether there may be a fifth time during the looming potential US Recession and Global slowdown?


With China now coming out of its own Covid Lockdowns and its’ economy “regaining its footing”, the specific questions are:

  1. Will there be another China Credit Impulse?
  2. How strong will it be?
  3. How long will it last?
  4. Will it be sufficient to over-power a potential major global slowdown?

China has been opening the credit spigot but as of yet there is insufficient data to definitively answer these questions.

We can however examine the challenges facing China and draw some conclusions on what China might do to resolve these issues. And as a consequence what might be the spillover to the global economy?


Currently, the economic picture in China is not positive!  This is most easily seen by the Macro Economic Surprise Index which is pointed almost straight down for China and the US!

You will notice a cascade starting with the EU, followed by Emerging Markets, then China and most recently the US.   The index suggests we have a spreading GLOBAL problem.


China still faces significant economic challenges. The contraction in real estate remains a major headwind, and there is still some uncertainty around the evolution of the virus. Longer-term, headwinds to growth include a shrinking population and slowing productivity growth.

As this chart illustrates by the relative under-performance of Chinese equities compared to the US, EM and the EU many are not confident about the Chinese outlook.

Momentum appears to only be getting worse!


Even the Chinese Currency is under pressure and appears to be headed for yet another leg down!


We will get into the details of why this is happening in a moment but first we must talk about Chinese leadership.

A common feeling is that Xi Jinping’s leadership is resulting in a “Peak China”. This is because:

  1. China's economic growth is seen to be dramatically decelerating and there is much skepticism about Xi Jinping's ability to rejuvenate the country's fortunes,
  2. Forecasts of China surpassing the US in GDP and becoming the number one global economy are being revised,
  3. Xi's leadership is primarily responsible for the current state of China's economy, as his policies priorities social fairness and party control over economic reforms,
  4. Xi's crackdown on private-sector firms, especially in the tech, internet, and education sectors, has had negative consequences for the economy,
  5. Xi's push to tighten state control over information and data raises risks for businesses and investors in China is limiting transparency and increasing uncertainty (TS Lombard)


According to Bloomberg:

“Wall Street’s Biggest Banks Face a Harsh Reality Check in China”

They are:

    •  “Scaling Back ambitious expansion plans and profit goals as a deteriorating geopolitical climate and President Xi Jinping’s willingness to sacrifice economic priorities for security concerns rock the private sector and throttle deal making ….
    • There’s now a realization that they need a fundamental rethink on the world’s No. 2 economy because the business climate has weakened significantly and the best opportunities for making outsized profits in the country are over, according to the senior executives…
    • Publicly, everyone’s saying the same thing: China is still a massive opportunity and they have no plans to pull out, especially since so much money has already been spent….
    • Privately, Wall Street executives are saying it’s difficult to maintain good standing with both sides as tensions repeatedly flare” 

Increasingly, China is no longer a top-three investment priority for a majority of US firms … according to an American Chamber of Commerce survey;   and China is also now closing down cross-border broker trading apps to prevent capital outflows.


The recent poor reopening numbers are highlighting multiple problems.


The re-opening is losing its Mo-Jo!

After a strong post-Covid Zero rebound in the first quarter, the world's second-biggest economy is showing signs of cooling, with industrial output, retail sales and fixed investment all growing at a much slower pace than expected in April.

A housing rebound is also fizzling, while the youth unemployment rate soared to a record high and is likely to worsen."


Expectations are for real GDP growth to accelerate to 6.0% Y-o-Y in 2023 on the back of China’s ongoing post-reopening recovery and policymakers’ continued focus on growth. The easy part of the recovery is behind china and some persistent weaknesses in the economy around the property sector, youth employment, and consumer confidence will require more targeted policy support to counteract. (we will get back to these weaknesses in a moment)


Recapping China’s latest data we have:

  • China's April activity and spending data significantly disappointing expectations.
  • RETAIL SALES: Rising +18.4% Y/Y in April, improving from 10.6% Y/Y in March, but missing the consensus estimate for +21.0% Y/Y.
  • INDUSTRIAL OUTPUT: Rising by 5.6% Y/Y in April, rising from a rate of 3.9% Y/Y in March, but short of the 10.9% estimate.
  • RATE OF URBAN INVESTMENT: Pared to 4.7% Y/Y in the month, missing expectations of 5.5%, and
  • URBAN UNEMPLOYMENT RATE: Following marginally to 5.2% from 5.3%.


According to Capital Economics, and I quote them:

"Growth on most indicators accelerated in Y-o-Y terms in April. But this was due to a weak base for comparison from a year ago when Shanghai and several other cities went into lockdown - in seasonally-adjusted M-o-M terms it was mixed.”


 "The recovery in consumer spending regained some momentum and investment growth held steady but industrial activity contracted. While the boost from reopening should still underpin a further recovery in the near-term, the bulk of China’s rebound is now behind us. The recovery still has some legs, although will likely fizzle out in H2, as fiscal support is being unwound. The rebound in Credit Growth is stalling, while the Housing Market appears seems to be struggling for momentum. “

Separately: Global economic challenges may prevent a pick-up in Chinese exports.


China’s imports contracted sharply in April, while exports grew at a slower pace, reinforcing signs of feeble domestic demand despite the lifting of Covid curbs and cooling global growth.



China’s reopening was thought to be an inflationary catalyst but that has not come to fruition. The key is the lack of fiscal stimulus and a reopening impulse that has dissipated quicker than expected.

The ~20% youth unemployment also means that you are unlikely to have an analogous wage spike like you saw in the US, where minimum wage increases, both statutory and voluntary, were the primary factor.

JPM cut its Q2 GDP forecast from +6.3% to +3.5%; and FY23 is now 5.9% down from 6.4%.

Separately, the Black Sea Grain Initiative is another situation that had the potential to spike Ags prices. The agreement has been renewed for two months; corn, soybeans, and wheat all sold off in response. The biggest risk to this thinking is acceleration in Core Services in the June CPI print triggering another rate hike.


There seems to be strong evidence that we have at least a short term peak in China?

Let’s jump to some policy prescriptions and where they may lead us.


To jump-start the economy, Chinese leaders must move beyond the familiar playbook that calls for boosting exports and government investment stimulus. Without first addressing the problems of household under-consumption and sluggish income growth, public pessimism about the future may offset the positive effects of export growth and government stimulus, holding back economic recovery.

Chinese household consumption was a solid growth driver supporting nearly 40 percent of Chinese GDP over the past two decades. China’s rising consumer class was willing to spend more on aspirational goods, confident that their incomes would continue to grow. They were right: The Chinese economy maintained an average of 9 percent annual GDP growth rate for nearly two decades between 2000 and 2019. As a group of Gallup researchers observed using data from a 10-year nationwide survey of the Chinese people, about 3.5 percent of Chinese households had annual incomes of 30,000 yuan (about $3,800) in 1997. This number skyrocketed to more than 12 percent in just five years. Researchers found a continued strong consumer appetite for both must-have items and discretionary fun.


Until roughly 2017, household consumption growth never lost steam. Yet during Chinese President Xi Jinping’s second term, Chinese households experienced the worst slowdown in consumption growth in a generation, dropping from 6.7 percent during Xi’s first term to 4 percent during his second term—considerably slower than GDP growth. Although the nationwide lockdowns and supply chain disruptions have certainly contributed to the downturn in consumption, the Chinese government’s regulatory crackdown on the tech industry combined with China’s worsening external environment have also fueled an unemployment crisis, especially among young people.


The gap between consumption growth on GDP growth has widened since the COVID-19 pandemic hit. Before the pandemic, China’s real per capita consumption grew at an average annual rate of 6.38 percent from 2013 to 2019, 59 basis points below the average annual real GDP growth rate of 6.97 percent. This gap increased to 170 basis points from 2020 to 2022, when GDP growth dipped sharply to 4.5 percent, but consumption plummeted to 2.8 percent, less than half the rate before the pandemic. 2020 saw Chinese household consumption experience the sharpest contraction in growth since the 1990s, even though China was the only major economy to see economic growth that year.


As sharp as the pandemic’s impact was, declining income growth has been the real driver of shrinking consumption during the Xi years. The average nominal annual household disposable income growth rate fell to 8.39 percent from 2013 to 2022 from the average rate of 11.04 percent from 2001 to 2012. Chinese households are experiencing the worst material stress as income growth stagnates and are more insecure about their economic security than at any time since 1990. In November 2022, China’s Consumer Confidence Index plummeted to a record low of 85.5 points.


China’s exports have boomed, but that hasn’t helped ordinary households. This suggests China cannot export its way out of an economic slowdown or stimulate its way toward an economic boom. Boosting export growth is important, but its marginal effects at this point are limited. China became the world’s largest exporter in 2009, and in 2020, China’s share of global goods exports reached 14.7 percent, more than the shares of the United States and Japan combined. China’s exports-to-GDP ratio peaked in 2006 at 36 percent and has since declined below 20 percent between 2016 and 2020. Even if China could increase its service exports while maintaining its dominance in goods exports, there is only a narrow space for the exports-to-GDP ratio to rise as China’s GDP grows and supply chains relocate out of China. A report by New York University’s Stern School of Business and DHL projects China’s export growth rate to decline from 6.6 percent from 2016 to 2021 to 3.4 percent from 2021 to 2026.

The usual government solution to hard economic times has been major stimulus packages—but over the past 14 years, these have exacerbated local government indebtedness, chained financial stability to an unstable and often corrupt property market, shrunk fiscal space, and raised the amount of credit necessary to stimulate growth for future crisis response.


China’s two major economic stimulus packages offered a temporary boost but had long-lasting negative consequences. In the wake of the 2008 financial crisis, the Chinese government deployed 4 trillion-yuan stimulus ($586 billion) between November 2008 and December 2010. This stimulus boosted growth to 8.7 percent in 2009 and 10.4 percent in 2010, and it gave China the final push to overtake Japan and become the world’s second-largest economy in 2010. However, this short-term growth came at the cost of ballooning local government debts and rampant expansion of local government financing vehicles (LGFVs). These are investment companies owned and provided with capital by local governments for the purpose of issuing debt in bond markets and financing property development and other local infrastructure projects. Because the primary lenders to LGFVs have been banks, a large-scale default of LGFVs could trigger contagion in the banking sector. Additionally, debts raised by LGFVs can be more susceptible to corruption because they are kept off local governments’ balance sheets. The 2015 to 2016 credit expansion to save the stock market crash amid a housing market slowdown was estimated to have cost at least 5 trillion yuan ($805.2 billion). Despite costing more, the effect of this was weaker than the first round of stimulus—and aggravated the legacy problems of the previous 4 trillion yuan in spending. International Monetary Fund (IMF) research showed that the price to generate the same amount of nominal growth from 2015 to 2016 more than tripled the cost in 2008.


During the pandemic, the Chinese government strongly encouraged local governments to take advantage of the special purpose bonds program—introduced in 2015 as a form of off-budget financing that local governments use to issue bonds and raise capital to finance a particular policy or address a certain problem—to front-load the economy with more infrastructure investments and public projects. Bloomberg estimated that China’s stimulus through various financial and monetary support amounted to around 35.7 trillion yuan ($5.3 trillion) by the end of May 2022 in addition to the 30 trillion yuan stimulus in 2021 and 37.5 trillion yuan stimulus in 2020. In August 2022, the State Council added another 300 billion yuan in credit support using its policy banks.

All of these credit expansions with record-breaking exports only generated 3 percent growth in 2022 but at a mounting cost. The result of a proactive fiscal policy for over a decade since 2008 is that about a quarter of Chinese provinces will spend more than half of their fiscal revenue on debt repayment by 2025, as former Chinese Finance Minister Lou Jiwei warned. Previous credit expansion schemes also aimed to support major corporations, not to boost private consumption or provide household support. As a result, Chinese household income growth and consumption growth fell behind GDP growth. Although the U.S. government’s pandemic relief measures were also primarily targeted at corporations rather than households, many American households received greatly increased unemployment insurance as a cushion. However, this option was unavailable for the hardest-hit millions of unemployed migrant workers and recent college graduates in China.


In this context, Chinese leaders’ recent shift over the last year to prioritize private consumption for economic recovery is the right policy move. The government issued two critical documents about consumption. In April 2022, the State Council released the “Opinions on Unleashing Consumption Potential and Promoting Sustained Consumption Recovery.” The report mentioned 20 measures in five areas to promote consumption, providing implementation guidelines for local governments. In December 2022, the day before the Central Economic Work Conference (CEWC), the National Development and Reform Commission published the “Strategic Planning Outline for Expansion of Domestic Demand (2022-2035),” which laid out 38 measures to boost domestic consumption in 11 areas over a 12-year horizon. While acknowledging the critical role of investment, the outline put “expanding household consumption” before “effective investment” as a long-term strategy for the first time. At the December 2022 CEWC, policymakers reaffirmed their intention to prioritize supporting household consumption over investment and export.

One way to interpret these policy announcements is that they collectively signal that Chinese policymakers have recognized the urgency of correcting China’s under-consumption problem. If this is true, then this year could be a watershed moment as the government pivots toward prioritizing household consumption over exports, which was China’s canonical growth strategy since 1978.

But changing the course of government priorities in China, especially ones deeply mixed with local government finances, can be a slow and tangled process at best. And even if Chinese leaders genuinely attempt to prioritize consumption, then they face two primary challenges: financial repression and household balance sheet deterioration.


Since Deng Xiaoping, three generations of Chinese leaders have established a system of financial repression that suppresses consumption, forces savings, and prioritizes export and state-led investments.


At the operational center of China’s repressive financial system is state-owned commercial banks, whose primary customers are state-owned enterprises and have little experience promoting relationship banking. Take the episode in 2022, when Chinese banks offered loans to companies and then allowed them to deposit funds at the same interest rate, or the time when Chinese banks inflated their loan numbers by swapping bills with one another to meet regulatory requirements for corporate lending. Both are sad evidence that the only type of lending that Chinese banks know how to do—and are allowed to do in the current system—is lending to enterprises, and when demand from enterprise is weak, Chinese banks are incapable of channeling credit to anyone else, especially consumers.


The balance sheet of the average Chinese household has gotten increasingly dire over the last 15 years. Household net asset growth has decelerated since 2010, a problem that worsened during the pandemic. A report by Zhongtai Securities, a Chinese securities service firm, estimated that between 2011 and 2019, Chinese household net asset growth rates dropped to around 13 percent from close to 20 percent before 2008. During the pandemic, household net asset growth sunk below 10 percent.

Most of this wealth is concentrated in the country’s increasingly shaky property sector. An urban household balance sheet survey conducted by the People’s Bank of China in 2019 showed that housing was roughly 70 percent of household assets, with mortgage loans accounting for 75.9 percent of total household debt. This level of indebtedness was comparable to the United States in the run-up to the 2008 subprime crisis and the burst of the real estate and stock market bubble in Japan in the 1980s.


Between December 2008 and December 2022, the Chinese household debt-to-GDP ratio increased from 17.9 percent to 61.9 percent, equivalent to an annual increase of 17.6 percentage points. Chinese household debt reached an all-time high of 62.4 percent of GDP in September 2021 and has since maintained above 62 percent of GDP. IMF research showed that higher household indebtedness boosts consumption growth in the same year but reduces it after two years—and acts as a severe drag on consumption even when incomes grow.


Household debt has also risen faster than income growth. Between January 2007 and December 2022, Chinese household debt increased from $517.66 billion to $10.86 trillion, amounting to an annual compound growth rate of nearly 22.5 percent. During Xi’s first two terms, household disposable income grew at an average annual real rate of 6.25 percent. In contrast, the household debt-to-income ratio increased from 68.7 percent in 2013 to 161.5 percent as of September 2022, higher than the U.S. ratio of 119.8 percent. From 2011 to 2021, driven by fast-growing mortgages, the Chinese household leverage ratio increased by 33.8 percentage points, the fastest increase in the world. Between 2012 and 2021, household debt increased at an annual rate of 18.3 percent, whereas income rose only by 10 percent annually.

Fast-growing household debt combined with pandemic lockdowns, salary reductions, layoffs, and major policy swings has exacerbated Chinese households’ financial insecurity. The most unfamiliar—and most challenging—problem for Chinese policymakers is not decoupling or weakened exports. The real test comes at home: how to incentivize and persuade disheartened Chinese families to contribute to economic growth by expanding household consumption. The government has previously mobilized households to boycott foreign goods or travel, but can it mobilize Chinese people to spend more when many have become increasingly insecure about their economic future?


What we haven’t been able to focus on yet is that China has a secular labor problem.

It is twofold:

  1. Rising Labor costs cutting into margins while maintaining pricing competitiveness,
  2. Full employment with surging & serious youth unemployment.

In China the government is expected to deliver jobs. Without achieving that, the CCP loses its political authority and seriously weakens its power.


To place the problem in perspective we need to appreciate that the US has a population of ~334M with ~161M people working.

China has a population of 1.4B people with 734 Million people working.

Think of the magnitude of problem China has when the economy slows or foreign exports weaken. With razor thin margins because China built its manufacturing power on cheap labor and tight margins.

For years china had nearly 50M new workers leaving the rice patties and heading to the cities for work that at least paid a subsistence wage.


Yes at the end of last year China was coming out of their Covid lockdowns but still reported a reduction in the labor force of 1.3 Million jobs.

That is a lot of angry out of work people!

What about the millions looking for new work?


Just looking at Youth Unemployment it has at staggering levels of 20.4%.


China is graduating millions from their Universities who can’t find jobs!


Meanwhile overall wages for those actually working has grown 9.7%


As part of Asia, which is now delivering 70% of global growth, China is fiercely competing with the other Asian Tigers.

That battle has now reached the point of being almost tied with each at ~50% of that pie.

The bottom line is that China has major and serious problems it must quickly solve before social unrest becomes unmanageable.

These are not problems that stimulus or ccpaital investment will solely solve if the global economy slows and the US heads into a recession.

Never forget that as a 70% consumption economy the US is the dominant source of global demand!

The US consumer has never let the world down by increasingly consuming more than it produces. Those days however may be coming to end – minimally for a period of time sufficient to cause significant disruptions.


What can we conclude?


Not all news out of China is bad news. There are some encouraging signs.


However, to answer the questions we started with:

  1. Will there be another China Credit Impulse?
  2. How strong will it be?
  3. How long will it last?
  4. Will it be sufficient to over-power a potential major global slowdown?

China's credit impulse experienced a much lower peak in 2022 than during prior cycles, reflecting an important policy shift. After adopting countercyclical policies, which involve large fiscal stimulus and credit boosts during economic slowdowns, for over a decade, China's policymakers have been gradually adjusting their policy approach toward "cross-cyclical adjustment." This strategy emphasizes preemptive, nimble, targeted, and long-term focused policymaking, and avoids excessive and ineffective stimulus.

Global investors may be disappointed as the policy shift implies China's economic growth is unlikely to revert to the elevated levels seen in the last decade. However, slower growth is not necessarily a negative development. The previous adoption of "countercyclical policies" often left the Chinese economy veering from sharp upturns to significant slowdowns, rendering it reliant on easy money.

Now, with the adoption of the "cross-cyclical adjustment" framework, investors should expect that China's credit growth trajectory will be managed such that it doesn't lead to boom-bust cycles and excessive leverage. The country should emerge with a stronger balance sheet and less financial risks.

The seemingly prudent and positive policy actions have resulted in a stable outlook for China and made the country a bright spot amid significant global economic uncertainty. Investors, treating China as a key diversifier of global portfolios, should return focus to organic economic growth and bottom-up fundamentals, instead of speculating on large policy stimulus.


China’s global role is changing!

Yes, China’s reopening will support near-term resilience in global growth this year.

However, the spillovers to global demand of China’s recovery will be different this time.

The main driver of recovery is not investment but household consumption, which has much lower import content.  That means less of an impact on worldwide commodity prices and inflation.

Still, it would be a mistake to see this as evidence of a more specific decoupling between China and the ‘West’.  In fact, global trade has reached new highs over the past two years, even though China’s share of US imports has declined somewhat since the imposition of tariffs.

Much of the talk about multi-nationals leaving China is simplistic. Some are setting up a separate supply chain for the US in order to avoid restrictions. Others are switching to a ‘China+1’ strategy: retaining China as their main source of goods while building an additional supply chain in another country, like Vietnam. Many are doing both. For most international companies, China is simply too big to ignore.


In conclusion, China’s recovery will be different this time: growth will be slower than in the past, but also higher quality as spending shifts to consumption and new sectors.

This will create fresh opportunities but China is not going to save the US and world again this time by helping them with their demand!

China will be focused on savings itself and increasing its own domestic demand!


As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.

That day is still in the future so take advantage of the opportunities as they currently exist.

Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.

The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.


I would like take a moment as a reminder

DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.

As negative as these comments often are, there has seldom been a better time for investing.  However, it requires careful analysis and not following what have traditionally been the true and tried approaches.

Do your reading and make sure you have a knowledgeable and well informed financial advisor.

So until we talk again, may 2023 turn out to be an outstanding investment year for you and your family?

I sincerely thank you for listening!