In 1978, Deng Xiaoping started the Open-Door Policy,
where China became open to Foreign business. For the
next 40 years until 2017, China averaged almost 10%
annual GDP growth going from a closed centrally
planned economy to a global economic powerhouse.
Much of China's growth has been attributed to large-scale
capital investment (in factories and infrastructure) and
rapid productivity growth. Juggernauts inevitably slow
down – a classic example of Russia in the 1960s and Japan
in the 1990s - and this is now happening in China.
|
|
|
In this period of 40 years, about 20 million Chinese moved
from Rural to Urban areas every year (It was 20% of the
urban population in 1980, which is 70% now). New cities
had to be built. In 2008, when the Global Financial Crisis
hit, the Government pumped massive amounts of money
into the economy to protect jobs. They invested in
Infrastructure projects like airports, bridges and railways.
They also racked up massive amounts of debt, which fell
on the Balance Sheets of the local government rather than
the Central Government. The Provincial governments
started selling land to meet the debt obligations, fuelling
the real estate bubble. There was a boom in housing, and
property prices rose rapidly and accounted for 75% of
Chinese wealth and about 30% of all economic activity.
|
However, as the investment in infrastructure
development increased, the productivity returns started
diminishing. By 2020, the Chinese Government had
realised that this property bubble was getting too large
and was also limiting disposable income. Hence, they
curtailed the amount of money the property developers
could borrow. Evergrande got into a problem and, in
August 2023, filed for bankruptcy in the US. The problem
in the property market has gotten worse because of the
rise in interest rates, the general slowdown in the
economy and negative consumer sentiment.
|
|
|
Further, recently, Chinese President Xi Jinping has been
moving the country away from pro-investment policies
and back to its socialist roots. There is a new Central
campaign to curb the political and economic power of
major private entrepreneurs who refuse to follow the
central Party line in every respect - Jack Ma of Alibaba (Ant
group) and Sun Dawu (Chinese billionaire jailed for 18
years) are two examples. Xi Jinping is trying to move the
economy from less reliance on exports and more on
domestic Chinese consumption (In India, just 17% of our
GDP is exports - and hence, we are not so affected by
global slowdowns - most of it is in IT and Pharma)
|
In November 2022, demonstrations caused the
government to stop the Zero Covid policy - but the
opening of the economy did not result in revenge
spending, which happened around the rest of the world.
The harsh lockdowns have resulted in large numbers
suffering from anxiety and depression, and hence,
consumer confidence is low. Youth unemployment is at
an all-time high at over 20% - so much so that the
government will stop giving this statistic going forward.
Demographics are very worrisome with the ageing
population and the youth not able to find a job. Further,
Chinese parents had about half the number of children
last year than they had about 6 years ago, so the skewed
demographics is going to continue.
|
|
|
At the end of 2022 bank assets (loans) were US$ 44 tn in
China. - in the US it is US$ 23 tn and the US has a larger
economy. Either China will have a huge debt crisis or they
will have a big Balance Sheet recession like Japan had - you
wait years and years while the debt is paid off and there is
no money to buy other things. This lack of demand causes
deflation. They urgently need restructuring the debts of
the local government.
|
In July, China recorded deflation for the first time. The rest
of the world is battling inflation. Consumption is the
highest by the population in their 20's and 30's. And
China does not have a large percentage in this group and
also, they are plagued by high unemployment. Although
it is only one recording of deflation, it is hoped that China
does not have to go through the same depression cycle
that Japan did - which lasted for 25 years. However,
Japan's per capita was already high by the time they went
into the deflationary cycle. In China's case the country
could become old before it becomes rich.
|
|
|
The Yuan has hit a 16 year low against the dollar - because
of lack of demand for the currency - mainly due to global
trade. And they are going all in to stop it from losing more
and hence having to sell dollars. That is another statistic
that China has stopped releasing i.e. their dollar reserves.
Dollar outflows in July were US$ 26 bn. Rattled by dismal
economic data, deflation fears, a weakening housing
marker and a crisis in shadow banking lending - there is
likely to be a vicious cycle of capital outflows.
|
China's economic growth is now set to fall below the rest
of Asia for the first time since 1990. However, you cannot
count China out. They hold a lot of assets. Further the
Central Bank debt to GDP is at a low 30% although there
is massive debt in the Provincial states. There are steps the
Government can take to stimulate consumption. Reforms
such as gradually lifting the retirement age to increase
labour supply, strengthening unemployment and health
insurance benefits, and reforming state-owned
enterprises to close their productivity gap with private
firms would significantly help to boost growth in coming
years. You cannot write off China yet.
|
|
EQUITY MARKET
There are a few short-term problems in the Indian
economy:
-
Inflation spiked in July to 7.4% from an average of 4.6%
in the first quarter. Most of the surge has been due to
food inflation - hopefully temporary.
-
Uncertain global situation. The US yields are rising and
this is causing its own problems, including a surge in
bankruptcies. China is in a slowdown. Europe is
technically in a recession.
-
India's recovery and growth continues to be K shaped
with consumption restricted to the upper middle class
and the rich. The rural economy had a tough year.
However, India is in a strong position with the banks and
corporates having stronger balance sheets, a climate of
structural reforms, an emphasis on public capital
expenditure, and a once in the life time opportunity to
|
capture supply chains relocating away from China. So once
the problems fade away, India is in a strong position to
accelerate its growth.
|
DEBT MARKET
|
|
GOLD & SILVER
MARKETS
-
With Dollar Index rising to US 104+ and long-term global
interest rates rising, Gold rate - which is internationally
quoted in dollars - have fallen. However, holding gold is
needed to offset the global uncertainty and works as an
insurance policy. In the month, the silver price has fallen
much less than gold.
|
|
|
REG. OFFICE: B-20, Jai Ganesh Vision, Akurdi, Pune 411035
CORP. OFFICE: Office 101-103, Pride Silicon Plaza, 1st Floor, SB Road, Pune 411016
|
|
|