A Chinese external crisis is still one of my top possibilities for how this Fed tightening cycle ends. Today we can see why. A Chinese trade shock is coming down the pipe. Pantheon:
In one line: Another record trade surplus as reopening remains a one-sided affair
Export growth was led by trade with the U.S., up 19.3% y/y from 15.7% in May, and ASEAN, up 29.0% y/y from 25.9%, with Japan-bound exports also accelerating, to 8.2% y/y from 3.7%. Exports to the E.U., however, slowed, to 17.1% y/y from 20.3%, likely reflecting the intensifying energy crunch.
On a product basis, preliminary data showed an acceleration in exports of ships, growing 16.5% y/y after falling 21.5% in May, mechanical & electrical products, up 12.5% from 9.4%, and data processing equipment, which grew 9.2% y/y after falling 5.5%, helping to drive an acceleration more broadly in high tech exports, to 7.4% y/y, from 4.4%. Most other major categories saw slower growth in June than in May.
The patterns in the country and product data suggest that the surprise export strength in June was driven by continued catch-up demand from China’s reopening, with regional supply chains still making up lost ground and drawing in intermediate goods from China, while resilient U.S. demand – and potentially restocking or hoarding given fears of renewed reopening bottlenecks – also provided some support. We also detect some seasonality in the data. On our seasonally adjusted estimate, exports saw a smaller increase, to 17.6%, from 17.1%. Monthly momentum also slowed, with exports growing 4.2% m/m, seasonally adjusted, from 5.5% in May.
We stick to our view that Chinese export growth will slow in H2, though admit that we’ve been wrong for longer than we would like. Data from other exporters points to slowing demand, and China’s share of global trade remains elevated. The reopening boost has lasted longer than we expected, but it cannot continue indefinitely.
Imports suggest domestic demand is yet to recover
The trade balance has received an unexpected boost from both sides of the ledger this month. Imports should be recovering more rapidly than this if the economy is reopening and demand returning. Instead, imports actually fell 0.5% m/m, seasonally adjusted, after growing 3.1% in May. Preliminary volume data showed y/y declines for oil, coal, iron ore, machine tools, semiconductors, and soybeans, all worse than in May. Copper imports, at least, saw an acceleration, suggesting some infrastructure stimulus effects, but the softness of iron ore indicates that construction overall remains in a sticky patch.
Consumers, too, remain stretched, and these numbers suggest continued weakness in the upcoming retail sales data. Worse is to come, given the recent spike in Covid cases, and tightening of zero-Covid restrictions. Imports seem unlikely to weigh on the trade balance next month, either.
Domestic demand is still buggered as external wilts ahead. The property crash is to blame and it is still getting worse:
More and more home buyers across China refuse to pay mortgages as the properties they purchased have been left unfinished amid the liquidity crunch in the real estate sector.
As of July 12, home buyers of more than 100 property projects across provinces including Hubei, Henan, Shandong, Jiangxi, Jiangsu, Hunan and Shaanxi had issued statements saying that they refuse to pay mortgage loans as the properties they purchased have been left unfinished, according to a report to The 21st Century Business Herald.
Of the projects, more than 30 are in central China’s Henan province and many are in the provinces of Hunan and Hubei, according to a report by Caixin.
The construction of the projects had been in suspension due to the developers’ liquidity difficulties, which means the home deliveries would be delayed, forcing them to take actions to safeguard their legitimate rights, the homebuyers said.
The developers of the property projects involved include China Evergrande Group, Sinic Holdings, Greenland Holdings, Sunac China, Kangqiao Group, Xinyuan Group, Sichuan Languang Development Co, Zensun Group and Myhome Real Estate Development Group, etc.
For instance, homebuyers of a project developed by property developer Times China in Wuhan, capital city of Central China’s Hubei province, said in a joint statement on July 7 that they had made several attempts to communicate with the developer and safeguard their legitimate rights, but failed to make any progress in the issue and the construction remained in suspension.
“If the construction of the project does not resume by August 1, we will all stop paying mortgages,” the statement reads.
Refusal to pay mortgages in response to delayed deliveries reflects the lack of effective financial supervision of related banks, especially on pre-sales funds, which may have been misappropriated to meet property developers’ debt payments or provide operating funds, they noted.
In their joint statements, the buyers accused banks of granting home mortgage loans before the the main structure of the properties in question get completed, which violated related regulations; transferring funds from mortgages to unregulated accounts; failing to ensure security of pre-sales proceeds, etc.
Most Chinese property developers are heavily dependent on pre-sales proceeds to secure their cash flows and the country has introduced regulations on the use of the proceeds in order to ensure property construction and home deliveries.
As early as 2003, China introduced related rules, under which “home mortgage loans can only to granted to home buyers when the main structure of the properties in question is completed” and “when the funds from mortgage loans is misappropriated for purposes other than property construction, the banks have obligations to bring back the funds.”
Under the rules adopted in 2010, all pre-sales proceeds should be put in custodial accounts and regulatory bodies are responsible for ensuring that the pre-sale funds are used for property construction.
Yan Yuejin, research director of the Shanghai-based E-House China R&D Institute, said that “the flows of the pre-sales proceeds of the projects in question are murky and the regulation on the funds were inadequate, which means, to some extend, banks should be held accountable.”
Notably, in February this year, it’s reported that China was drafting nationwide rules to make it easier for property developers to access funds from sales still held in escrow accounts in a move to ease a severe cash crunch in the sector.
In April, China’s Politburo, the top decision-making body of the ruling Communist Party, expressed supports for local governments’ move to adjust property policies to stablize the housing market and, for the first time ever, pledged to optimize regulations on property developers’ pre-sale proceeds.
Earlier data has shown that, as of the end of 2021, delayed deliveries in 24 major Chinese cities made up 10% of the total in terms of sales areas, according to real estate consultancy CRIC China.
In the most pessimistic scenario, delayed deliveries would account for 5% -10% of the nation’s total, according to CRIC data, which put the scale of potential mortgage defaults at 360 billion yuan to 730 billion yuan nationwide.
This would be a default rate of 0.9-1.9% of the nation’s total outstanding mortgage loans over the first quarter of 2021.
Banking crisis anyone? Yet the PBoC won’t hear of it. Goldman:
1. PBOC held a press conference on 1H money and credit data this afternoon, during which PBOC addressed questions on policy banks‘ support to infrastructure investment, potential RRR and interest rate cuts, and spillover effects from monetary policy tightening in developed markets. Specifically, PBOC mentioned the lack of capital had been one bottleneck for implementing major investment projects, and the RMB300bn financial bond issuance to be used as capital of these major projects would therefore help infrastructure investment (see here for our H2 fiscal outlook with related discussions).
2. When asked about potential RRR and interest rate cuts, PBOC commented that “the recent liquidity conditions are already ample and even slightly high” and “interest rates are low”, and PBOC would then “choose monetary policy tools based on the economic and inflation conditions”. This statement signaled PBOC’s focus on maintaining price stability, and is consistent with our view of no further RRR nor interest rate cuts in 2H of this year. PBOC would rely on structural monetary policy tools such as the additional policy bank credit support and various relending programs to support the overall economy. PBOC also stated that they submitted RMB900bn profits to the Ministry of Finance in the 1H of this year, and through fiscal spending, this added 0.4pp to M2 growth (in 1H of this year).
3. On concerns over the spillover effects from monetary policy tightening by major developed markets, PBOC stated they closely monitored the situation and had already prepared proactively through measures such as adjusting RRR for FX deposits. China’s monetary policy would still be mostly “domestic driven”. We are not very concerned about CNY depreciation pressures or outflow risks, barring significant worsening in the Covid situation, as sentiment towards growth outlook improved in June along with growth recovery, and we saw net inflows through the Stock Connect in June. The record-high trade surplus in June would also help buffer potential capital outflow pressures from unfavorable interest rate spreads.
4. In the weekly State Council meeting today, Premier Li reiterated the importance of maintaining employment stability, and urged local government officials to take responsibilities in supporting employment through more training and subsidies; and avoid discrimination against Covid recovered persons in the job market. In addition, Premier Li mentioned to support home appliance consumption through nationwide “go rural” (i.e. subsidies to rural residents’ purchases of home appliance”) and “trade-in” (i.e. allowing trade-in of old items when purchasing new items) programs. No concrete value amount was mentioned however in today’s State Council meeting.
China today:
- is spewing fiscal credit to little effect;
- has a 40% crash in property sales;
- has paralytic spreads for developers moving up the credit quality chain;
- has a spreading mortgage strike;
- has chronic COVID lockdowns;
- is facing a looming trade shock, and a falling yuan as the Fed tightens.
If you’re not worried about capital outflow then you’re dead between the ears.
