Phil Rosen
Sat, August 12, 2023
China's economy hasn't rebounded from the pandemic as expected, and now it faces a slate of obstacles.
Kevin Frayer/Stringer
China's post-pandemic rebound hasn't materialized and it faces mounting economic obstacles.
Beijing is grappling with declining trade and foreign investment, a shaky housing market, and deflation.
Experts say most of China's issues are self-inflicted, and warn that policies must change to improve confidence.
The world's second-largest economy isn't growing, producing, or trading as much as it usually does.
The pandemic rebound that China and the rest of the world were anticipating has yet to materialize, and official data suggests there's a long road ahead before the economy is back on its feet.
China's National Bureau of Statistics announced Wednesday that consumer prices dropped annually in July for the first time in two years, dipping 0.3%, just slightly better than median estimates for a 0.4% decrease.
The People's Bank of China is now facing the opposite problem of the Federal Reserve, which has tightened policy for 18 months in a bid to tame soaring prices. Deflation — the trend of prices falling throughout the economy — presents a particularly dangerous trajectory for China, which carries a massive amount of debt.
"Deflation means the real value of debt goes up," David Dollar, a senior fellow at the Brookings Institute's China center, told Insider. "High inflation we know is bad, but it does help manage debt burdens over time. Deflation does the opposite."
Bloomberg estimates total household, business, and government debt at about 282% of annual economic output.
The latest figures add to the anxiety that's already been swirling about what growth could look like for the rest of the year, and JPMorgan strategists cautioned that China risks a 1990s-style "Japanification" if policymakers don't address the housing market, financial imbalances, and aging demographics.
Officials in Beijing have urged experts not to portray data unfavorably, according to the Financial Times, asking economists to "interpret bad news from a positive light."
The numbers make this difficult:
Year-to-date, China's exports are down 5% compared to last year, while imports have dipped 7.6%
Manufacturing activity has contracted for four straight months
July exports declined at the sharpest rate in three years, at 14.5% annually
"Before the pandemic, China was growing at about 6%, and now it's struggling to recover," Dollar said. "Consumption really didn't hold up coming out of the lockdown. The main components of GDP on the demand side — consumption, investment, net exports — they all have serious problems right now."
China's post-pandemic rebound hasn't materialized and it faces mounting economic obstacles.
Beijing is grappling with declining trade and foreign investment, a shaky housing market, and deflation.
Experts say most of China's issues are self-inflicted, and warn that policies must change to improve confidence.
The world's second-largest economy isn't growing, producing, or trading as much as it usually does.
The pandemic rebound that China and the rest of the world were anticipating has yet to materialize, and official data suggests there's a long road ahead before the economy is back on its feet.
China's National Bureau of Statistics announced Wednesday that consumer prices dropped annually in July for the first time in two years, dipping 0.3%, just slightly better than median estimates for a 0.4% decrease.
The People's Bank of China is now facing the opposite problem of the Federal Reserve, which has tightened policy for 18 months in a bid to tame soaring prices. Deflation — the trend of prices falling throughout the economy — presents a particularly dangerous trajectory for China, which carries a massive amount of debt.
"Deflation means the real value of debt goes up," David Dollar, a senior fellow at the Brookings Institute's China center, told Insider. "High inflation we know is bad, but it does help manage debt burdens over time. Deflation does the opposite."
Bloomberg estimates total household, business, and government debt at about 282% of annual economic output.
The latest figures add to the anxiety that's already been swirling about what growth could look like for the rest of the year, and JPMorgan strategists cautioned that China risks a 1990s-style "Japanification" if policymakers don't address the housing market, financial imbalances, and aging demographics.
Officials in Beijing have urged experts not to portray data unfavorably, according to the Financial Times, asking economists to "interpret bad news from a positive light."
The numbers make this difficult:
Year-to-date, China's exports are down 5% compared to last year, while imports have dipped 7.6%
Manufacturing activity has contracted for four straight months
July exports declined at the sharpest rate in three years, at 14.5% annually
"Before the pandemic, China was growing at about 6%, and now it's struggling to recover," Dollar said. "Consumption really didn't hold up coming out of the lockdown. The main components of GDP on the demand side — consumption, investment, net exports — they all have serious problems right now."
Politicization of the economy
Increasingly, China's US-led Western trade partners have turned elsewhere. Global demand for Chinese goods has cooled, even as Russia ramps up trade with Asia amid its war in Ukraine.
The US Census Bureau reported Chinese exports to the US dropped 23.7% in June, hitting a six-month low of $42.7 billion. That reflects both the Biden Administration's "de-risking efforts," as well as a general pullback in spending as central banks around the world raise interest rates.
Near-shoring trends have also picked up since the pandemic. Mexico, for example, has emerged as America's new biggest trade partner, blowing past China with US bilateral trade totaling $263 billion through the first four months of the year.
Dexter Roberts, author of "The Myth of Chinese Capitalism" and a senior fellow at the Atlantic Council, told Insider that much of Beijing's troubles stem from its politicization of its economy.
Embedding Communist Party members in corporations and prioritizing state-run firms, he said, has dragged on domestic productivity, spooked the private sector, and made the country less attractive for foreign investment.
"A lot of companies now feel China isn't the market of the future," Roberts said.
To that point, China's foreign investment gauge plummeted to a 25-year low in the second quarter.
A shaky property market
Most of China's economic troubles tie directly into its property market.
China was able to skirt deflation in 2009 and 2012 on the heels of the global financial crisis, but today's housing market complicates policymakers' current battle.
Notwithstanding recent price declines, property values have appreciated dramatically since 2009, and fiscal stimulus measures may not have the same impact as before. China's allowed developers to over-build, and now the inventory glut has crippled major developers.
Last week, Country Garden Holdings — once China's largest developer by sales — failed to make millions of dollars' worth of coupon payments on its bonds, and it anticipates reporting enormous first-half losses.
Similarly in July, Chinese developer Evergrande, which made headlines in 2021 with a massive debt default, recorded a two-year $81 billion loss.
Real estate accounts for about one-fifth of the country's economy, and the sector's headwinds include hefty debt and weak demand from homebuyers. Home transaction volumes across 330 cities in China cratered 19.2% year-over-year in June, according to a Beike Research Institute study, and values have dropped 23.4%.
The slump helps explain China's weak second-quarter GDP, which came in lower than expected at 6.3%.
"Housing prices are going down, so people aren't making purchases," Roberts said. "So much of people's wealth is tied up in the property sector, so when they see values go down, they decide to save for the future and not spend. The Chinese government won't be able to lift the property sector without that confidence."
The long tail of China's one-child policy
Even if Beijing could somehow remedy its other issues, years of a one-child policy may have long ago crippled its economy for decades.
In 2022, the population shrank for the first time since 1961, and the consulting firm Terry Group said the country is on pace to lose nearly half its population by 2100.
But it's not just population decline that weakens China. It's the climbing proportion of elderly people.
In 1990, 5% of Chinese people were 65 or older. That's at 14% today, and could surge to 30% by 2050, per Terry Group. By their estimate, China could lose an average of 7 million working-age adults each year by the next decade.
Already, working-age couples have to support aging parents, education costs for children are climbing, and confidence in the economy is low.
For China to have a shot at improving demographic conditions, experts say Beijing will have to unwind its long-standing household registration system. The policy, which dates back to the 1950s, makes rural-to-urban migration unfavorable and difficult, as it ties social welfare benefits to where people are born.
Roughly a quarter of China's population works in agriculture — well above the 3% mark in the US — and that presents its own productivity limitations.
"I'm skeptical they'll do it, but if Beijing did away with household registration, it would mean a large portion of the Chinese population that's treated as second-class citizens would start to spend more, have more confidence in the future, and drive more productivity across the economy," Roberts said.
Rocky decade ahead
China's laundry list of issues point to a rocky decade ahead.
From an unstable, debt-ridden property market to anti-business policies and demographic issues, Beijing has plenty to tackle if it hopes to match the same growth as decades past.
Geopolitical hurdles involving the US, Russia, and other trade partners present further headaches for President Xi Jinping, but experts say the focus should be on domestic issues.
For Dollar, he expects China to eke out 5% growth this year, as Beijing forecasts, but without financial or demographic reforms, growth could hover closer to 3% for the next decade.
China Hedge Funds in Crisis After Losses, US Investor Retreat
Bei Hu and Nishant Kumar
Sun, August 13, 2023
(Bloomberg) -- Foreign investors are losing interest in China, and hedge funds that target the world’s second-biggest economy are paying the price.
The number of active China-focused hedge funds has slipped for the first time since at least 2012, with only five new funds launched this year as of June, according to data from Preqin Ltd. Another 18 funds were liquidated, the data show.
The contraction marks a major shift for offshore China hedge funds, which accounted for almost half of new funds in Asia as recently as 2021 as investors sought to ride the wave of the once high-flying economy and capital markets. Beijing’s crackdowns on private companies in industries including after-school tutoring and e-commerce, along with growing geopolitical tensions with the US, have led to weak returns since then and sapped global investors’ appetite for China assets.
“We definitely see less demand for China managers from both Asia and foreign investors,” said Otto Chan, head of portfolio management at Persistent Asset Partners Ltd., a 21-year-old fund of hedge funds firm.
Dantai Capital Ltd. shuttered its flagship Greater China hedge fund this year after concluding its investment strategy no longer worked in the current market environment. Tiger Management LLC-backed Yulan Capital Management also liquidated an Asia hedge fund focused on Greater China in late 2022, according to a newsletter.
China-focused hedge funds — stock pickers in particular — are facing an unprecedented second consecutive year of losses, according to Eurekahedge Pte data. More than two-thirds of China-focused hedge funds lost money in 2022, while 36% were down a fifth or more. In the first half of this year, 62% of China funds failed to make money, Preqin data showed.
China’s economic recovery is losing steam despite Beijing’s recent policy support, while geopolitical tensions with the US are showing little signs of letting up.
Managers put on a brave face in public, touting the country’s long-term growth potential and cheap valuation. In private, they bemoan the end of offshore China hedge funds, those that raise money from international investors to trade securities related to the country, said one of them.
Legends China Fund dropped 16% in the first seven months of 2023, after more than 20% losses in each of the last two years, according to a newsletter and a person with knowledge of the matter, who asked not to be identified discussing private information. Blue Creek China Fund was down 17% in the first half, struggling to end a losing streak that began in 2021, according to its June newsletter.
A representative for Legends declined to comment. Blue Creek didn’t reply to emails seeking comment.
Certain shared characteristics of offshore China funds made them particularly vulnerable to the latest regulatory and geopolitical headwinds.
Some 88% of the 417 China-focused hedge funds in Bloomberg’s database specialize in equity long-short, or taking bullish and bearish wagers on stocks. Out of those, two-fifths are long-biased. The strategy tends to fare better when the market is in an upswing. Many focused on investing in tech and e-commerce stocks.
Greater China equity long-short funds were down about 1% through July, with 11% reporting their figures, according to Eurekahedge.
The MSCI China Index has dropped 43% since the end of 2020, versus a 19% gain for the US S&P 500 Index over the same period.
Investors are seeing more political risks for their China investments and have become less confident about the long-term economic upside, said William Ma, global chief investment officer of GROW Investment Group, a Shanghai-based asset manager backed by Julius Baer Group Ltd.
Some investors who have been hurt by their China exposure for two years are waiting for a market rebound to reduce their holdings. With North American pensions scaling back existing allocations or putting future plans on hold, other investors are wary of being caught in the path of these outflows, said another long-time investor in Asia hedge funds, who asked not to be identified because of the political sensitivity of such comments.
Shifting Tactics
Facing this existential crisis, China managers are trying to adapt.
In the last three years, APS Asset Management Pte, which oversees $2.1 billion in China long-short and long-only strategies, has seen tepid interest from North American backers, especially among the public pensions, said President Ken Chung.
The Singapore-based company has in recent months redirected capital raising efforts to include the Middle East and South Africa. In the first half, it scored its maiden investors from these two geographies.
“We’ve grown up in a world where it’s a US-led global world order,” Chung said. “Going forward, it will be a two-sun solar system. One is US-led, one is China-led. And there will be planets that revolve around either one.”
Some managers who previously targeted international investors are pivoting toward a domestic audience, pitching funds that will trade regional or even stocks globally, said GROW’s Ma, declining to identify the firms.
As supply chains diversify away from China, others are touting their edge in a so-called “China+1” strategy. That involves tapping into the trend of Chinese companies building production facilities in places including Cambodia and India, or expanding sales outside of China and US markets, Ma said.
Certain past investment approaches such as momentum trading will have to change, said Chris Wang, chief investment officer of Yunqi Capital Ltd. in Hong Kong.
The “extremely high risk premium” investors attach to the China market may put company fundamentals, corporate governance and shareholder returns in the spotlight. The largest profit contributor to his China fund last year was TAL Education Group, which was sitting on cash levels that were twice as high as its market value when he built his stake, Wang said. His largest bullish bet now is on Qifu Technology Inc., which has been handing back half of its earnings to investors through dividends and share buybacks.
“Companies are sitting on a lot of cash. Investment opportunities and returns are not as attractive as they used to be,” he said. “So it’s logical to boost investor payout. It’s clearly going to be a major trend in the next five to 10 years.”
--With assistance from David Ramli.
Bloomberg Businessweek
