What happens here if China’s economy actually crashes?
So one of the things that I think all those people calling for rate hikes miss right now is just how fragile the global economic outlook is right now.
The Ukraine situation is the obvious one, but lurking behind that is the very real prospect that China’s economy comes off the rails and ploughs into the snow.
Right now, China is the only country in the world still aggressively pursuing a zero-Covid policy. Even WA has moved on from that.
And right now the city of Shanghai – a city of 26 million and one of the world’s major financial centres – is in complete lockdown.
And in true China style, they have drones patrolling the streets and making sure everyone stays home.
But Shanghai is just one example. Covid cases have spiked exponentially in recent weeks:
That means that is going to be very difficult and very expensive to get back to zero, if its even possible at all.
But Beijing is going to give it a red-hot go.
And the economy is paying the price. With people stuck at home, tourism revenue is down to just 39% of what it was pre-Covid. That’s not down by 39%. It’s down to 39%.
And the PMI – the Purchasing Manager’s Index, a survey of China’s business leaders – is tanking quickly. Both Business Activity and New Orders are down to the lowest levels since the initial outbreak in 2020.
So the economy is in trouble. There’s a good chance China is already in recession.
At the same time, the property sector – one of the largest and most important sectors of the Chinese economy – is in a world of pain.
Chinese developers are still getting slaughtered on international finance markets. Many are hanging on for now, but many of the biggest ones are already functionally bankrupt.
As a result, no one is buying anything. You can’t buy a property off a developer when there is a very real chance that the developer is about to go down, taking your money with it. Who would?
As a result, daily property transactions are down 46% on 2021 levels, and about 80% on ‘normal’ levels.
Normally you’d expect the PBOC – The People’s Bank of China – to start slashing rates in the face of something like this.
But nup. They’re battening down the hatches and setting up an agency to stop bad loans escalating into a full-blown crisis:
China on Wednesday unveiled a draft law on financial stability, including the setup of a financial stability protection fund, in a move to prevent systemic financial risks amid increasingly complex domestic and global environment.
The country will establish a financial stability protection fund to strengthen the ability to cope with major financial risks, and set up a comprehensive cross-agency mechanism for risk detection and disposal, the People’s Bank of China (PBOC) said in a statement elaborating on the draft law.
Remember the government triggered all this with their “Three Red Lines” policy – a policy which put hard limits on the leveraging of developers.
This has crushed developers – which was the point – and now the government’s not backing down. They’re not going to save the property sector. They’re just getting ready to mop up the mess.
And then on top of economic lockdowns and a collapsing property sector, you have the massive Chinese export sector, which is selling to a customer base (the rest of the world) which appears to be slowing quickly, into the headwinds of inflation and an energy crisis.
How long is that one going to last?
So China is facing some massive MASSIVE challenges.
And China is still one of the most important nations on Earth. If China goes under, it’s going to create massive drag on the rest of the world.
And the RBA won’t be blind to this.
So the idea that the RBA is just going to hike like a madman into this potential storm is just ludicrous.
It will be very slow and steady as she goes.