Twenty years ago, US columnist and author Gordon Chang wrote a book titled, ‘The Coming Collapse of China’. Books about the imminent demise of the Chinese economy have been a flourishing industry for decades. But is it finally time for their dire predictions to bear fruit?
This time, China is being buffeted by a perfect storm. China Evergrande, the country’s second-largest property developer, is in deep financial trouble — its debt totals a massive $300 billion and it has warned investors that it is close to default. If it collapses, the real estate sector, which accounts for over a quarter of China’s GDP, will be badly hit.
But that’s just the tip of the iceberg. Property has been the investment of choice for millions of Chinese wanting a ticket to the middle-class dream and those dreams going up in smoke will lead to massive social discontent.
Growth has been slowing, as the August data on retail sales and industrial production indicate. Home sales already slumped by 20 per cent in August.
Fresh COVID-19 outbreaks have been met with severe restrictions in an attempt to stamp them out, which will affect growth further. One forecaster has said Chinese growth in the September quarter will be near zero. The economy is massively leveraged, with the debt to GDP ratio at the end of March this year estimated at 268 per cent.
Add to that the turmoil in China’s businesses as a result of the crackdown by the Communist party. The sectors on which the authorities are leaning heavily include fintech and shadow banking companies, edtech companies, ecommerce and social media, those earning ‘excessive income’, gaming companies, app based ride-hailing or food delivery businesses, bitcoin miners, US-listed Chinese firms and real estate companies.
And then there’s the confrontation with the West. This week, the US, the UK and Australia announced a military pact to contain China.
For the longer-term, there’s also the problem of a decreasing workforce.
The big question is whether all these factors, which will inevitably result in a growth slowdown, will lead to disenchantment with the ruling party. It’s no wonder then that Xi Jinping’s new mantra is ‘common prosperity’.
The markets are counting on the Chinese government bailing out Evergrande, just as they did Huarong, the state-owned distressed debt management company. In our Eastern Window, we took a look at the fallout from Evergrande and the crash in Chinese stocks listed in the US.
In India, the week saw the government guaranteeing the security receipts to be issued by the newly-minted National Asset Reconstruction Company Ltd (NARCL), more commonly known as a ‘bad bank’. Will it really achieve its purpose? Or will it, in a few years, go the way of Huarong? We weighed in on the subject here and here.
India too saw a bailout of a telecom company by a change in government policy, the effects of which we analysed in detail.
Apart from the bad bank and the relief to telecom, the government has also come out with a slew of measures such as production-linked initiative (PLI) schemes for the textile and auto sectors.
The RBI’s state of the economy report was also upbeat and Deputy Governor Michael Patra’s speech introduced the notion of a long and slow glide path of inflation to 4 per cent, indicating that the central bank’s normalisation of policy too will be long and slow.
All this, of course, was music to the market’s ears and it reached fresh highs this week. The buoyant mood was aided by good monsoon rains and an improvement in employment and consumer sentiment, seen from our recovery tracker. The vaccination run rate too has improved, as our Herd Immunity Tracker showed. IIP data was strong overall, but had its weak spots. Thermal power plant utilisation rose to the highest in seven years. Demand for digitally skilled professionals is eight times more than supply. There has even been talk of scrapping the pesky National Anti-Profiteering Authority. After all this cheery news, we naturally had to ask the question: If the recovery is so strong, isn’t it time to cut back stimulus?
Zee Entertainment’s boardroom battles gave us plenty of entertainment this week, as we debated whether it heralded the dawn of a new age of shareholder activism in India.
The RBI’s state of the economy report had this to say about the equity markets: “Valuations are stretched but supported by expectations of strong earnings growth.” We prefer to err on the side of caution and accordingly suggested that investors book gains for now for CDSL, Happiest Minds and Ami Organics.
We found valuations attractive for Sharda Cropchem, Grauer and Weil and these railway engineering stocks. We also asked investors to take a look at AU Small Finance Bank, Nazara Technologies and Vijaya Diagnostic. We marvelled at HUL’s valuations, discussed whether the government’s efforts to reduce runaway edible oil prices will succeed, asked Zomato to come clean on its business exits, looked at the impact of the current spurt in demand for Coal India and considered how Indian investors could profit from sky-high shipping rates.
Will the turmoil in China spill over to the global economy and the markets, as it did in 2015 and 2016? Will the Chinese authorities kick the can down the road, or will they prefer to let some air out of the property bubble? Will the current crisis mean the end of China’s debt-fuelled growth model? And what impact will a slowdown in China have on the world economy? Will China’s loss be India’s gain? These are the questions the markets will cogitate on in the weeks ahead.