The Japanification of China takes another big leap forward. And a huge fight with Trump is coming up.
China’s Unexpected Retail Slowdown Shows Urgency to Boost Demand
Bloomberg reports China’s Unexpected Retail Slowdown Shows Urgency to Boost Demand
China’s retail sales growth unexpectedly weakened in November despite signs of improvement in the housing market, highlighting the urgency for Beijing to further encourage residents to spend.
Retail sales rose 3% from a year ago, the slowest pace in three months and undershooting even the most bearish of forecasts. Industrial output increased 5.4%, keeping momentum as the manufacturing side of the economy continues to outperform consumer spending.
“The data show that the recovery in domestic demand has remained sluggish, while the stabilization in industrial production was likely due to some order front-loading ahead of US tariffs and is not sustainable,” said Michelle Lam, Greater China economist at Societe Generale SA.
The data released by the National Bureau of Statistics on Monday underscores the need for Beijing to reignite consumers’ willingness to spend, especially after the reelection of Donald Trump as US president. The threat of a new trade war may diminish exports’ role as a growth driver after contributing to nearly a quarter of economic expansion this year.
The weakening in retail sales was surprising following strong sales of home appliances and cars a month ago thanks to government subsidies. While sales for those two categories remained strong in November, a number of discretionary goods recorded a slump. Cosmetics led the decline with a 26% plunge in sales from a year ago, while those of clothing, jewelry, beverages and tobacco and alcohol also decreased.
In response to weak data, the benchmark yield fell six basis points to 1.71%, extending a decline from above 2% at the end of November.
Lower for Longer
Yahoo!Finance reports China’s ‘Lower for Longer’ Pledge Has Sent Bonds Into Unknown
China’s $11 trillion government bond market has moved into uncharted territory as a new era of monetary policy opens up debate over how much further yields will fall from record lows.
Bond prices soared after the country’s powerful Politburo made its strongest commitment to monetary easing in more than a decade. The yield on China’s 10-year bonds fell to a record low of 1.77%, while longer-tenor yields also tumbled.
Investors are now confronting the risk of what once seemed unthinkable: China’s 10-year bond yields sinking below those of Japan, which currently pay around 1.04%, and potentially sliding even further from there. Yields of zero remain a long way off but talk of that possibility has surfaced, showing how dramatically things have changed in China’s bond market.
“Bond yields at 0% are a possibility,” said George Boubouras, head of research at hedge fund K2 Asset Management Ltd. He said the central bank will need to take an ‘anything goes’ approach to stimulus to avoid the economy sliding into a Japan-style balance sheet recession.
“The Japanification of China bonds may be inevitable at some point,” said Stephen Miller, a four-decade markets veteran and consultant at GSFM, calling the recent stimulus a sugar hit. “China’s issues are deep-seated structural issues. You can’t fully rule out the possibility of yields heading toward zero if these issues aren’t addressed,” he said.
Just four years ago, investors were drawn to Chinese government bonds due to their clear pick up over developed markets. Now, 10-year US Treasuries pay more than double the yield of their Chinese equivalent, after reaching their widest discount in more than two decades.
Debt Write Downs
Facing debt deflation, China’s best bet would be to allow more bankruptcies, write down debt, and strengthen the yuan. But it is highly unlikely to do so.
US hypocrites led by then Fed Chair Ben Bernanke pleaded with Japan to do that, then failed to do so at our turn in the Great Recession.
Counterproductive Policy
Lower for longer will suppress the yuan. It’s one way China has of countering Trump’s tariff threats.
But it’s also counterproductive.
Lower for longer did not help Japan, and negative yields helped neither Japan nor the EU.
Unfortunately, the only thing China seems to understand is growth by exports but that means a weaker yuan.
Huge Fight With Trump Coming Up
Earlier today I asked, Should We Take Trump Seriously or Literally on Huge Tariff Hikes?
Companies are mounting a campaign to soften the Trump’s trade threats, but Trump’s team says he is serious.
One thing we know is that China is serious. It is acting to weaken the yuan. And Tariffs will weaken the yuan further.
A huge fight with Trump is about one month away.
My answer is “of course not!” (IMHO).
Remember, Trump cannot read a memo longer than half a page. Therefore, he cannot read Mish’s essay or its equivalent, nor has he ever done so to learn about any complex subject. His advisers, when confronted by Trump’s magical thinking, will do the usual thing: urge a small token tariff increase and roll it out with a big PR splash.
My prediction: nothing meaningful will get done, things will get worse, and the cycle will continue — until something breaks.
To me, the interesting question is: what will break?
Will the dollar-EU-Yen money printing panacea break? High inflation would preclude more money printing, it seems to me. But (reading Mish) it looks like global deflation is a much bigger risk than inflation, going forward, even if tariffs aren’t increased.
China and Japan (and probably the EU too) are facing slow-growth, deflation, and beggar-thy-neighbor lower interest rates. Even China is apparently facing deflation because it is reaching global push-back against its export-driven growth. Europe (particularly France and Germany) are facing long-term contraction due to high energy prices from war sanctions and other problems. The global economy seems to be getting sicker and sicker (wars and sanctions don’t help), and I don’t see how Trumpian unilateralism (e.g. tariffs) will make matters any better.
Can the global economic system keep going like this without breaking somewhere down the line? If “broken” means a politically broken U.S., per Triffin’s dilemma, maybe the last election is a sign that the system is already broken.
The U.S. (e.g. Yellen et. al.) has always believed in maintaining a strong dollar. A strong dollar is suggestive of a strong country, but if taken too far for too long it creates (per Triffin) regional inequities, loss of jobs, etc. — i.e. weakness. I suspect it has gone too far. A thirty-year long cycle of internal erosion of jobs and political unity has resulted, and we are reaping the whirlwind.
IF Trump were to seek a weaker dollar (would Mish advocate this? I’m unsure), he’d need to lower U.S. interest rates without other countries doing likewise to avoid a currency war. This may be the main justification for a multilateral “Plaza Accord.” It’s interesting that the Plaza Accord came after the very strong medicine of a deep recession in the U.S. to bring inflation down, so the inflationary effects of a weaker dollar were apparently not so worrisome and the importance of strengthening the U.S. economy could be seen as in other countries’ interest too. Do the conditions for a Plaza Accord exist today?
If not, could Trump pressure our trading partners into a grand “deal” of similar scope? I think that could alleviate many global structural problems. Would it?
“US hypocrites led by then Fed Chair Ben Bernanke pleaded with Japan to do that, then failed to do so at our turn in the Great Recession.”
Ironic, huh?
– China’s retail sales growth growth unexpectedly weakened in November.
> Sounds like a Harris / Biden “U.S. Growth Report” as the word “Unexpectedly” gets used.
– Despite signs of improvement in the housing market, highlighting the urgency for Beijing to further encourage residents to spend.
> Sounds like a Harris / Biden “U.S. Housing Market Report” as the words “Despite Improvement” get used.
– Retail sales rose 3% from a year ago, the slowest pace in three months and undershooting even the most bearish of forecasts.
> Sounds like a Harris / Biden “Retail Sales Growth Report” as the words “Slowest Pace” get used.
– The data show that the recovery in domestic demand has remained sluggish.
> Sounds like a Harris / Biden “U.S. Domestic Demand Report” as the words “Remained Sluggish” get used.
– The weakening in retail sales was surprising following strong sales of home appliances and cars a month ago thanks to government subsidies.
> The more I compare China to the U.S. in growth, or lack thereof, it seems we are marching in “Lock Step” with China… Our subsidies kept the phony EV demand alive, as well as Solar Panels, Windmills, Home Charging Stations, Etc. Have allowed The Harris / Biden Team to have it appear these expenses were due to strong demand and people clamoring for this new crazy environmentally superior products, once they became “Affordable” with massive “Taxpayer Subsidies” of course, but until then all of these “New Ideas” were silly, too expensive, and hurt the environment. Now that they are paid for with other peoples money, Have At It!!!
– Facing debt deflation, China’s best bet would be to allow more bankruptcies, and to write down debt, But it is highly unlikely to do so.
> Once again, The more I compare China to the U.S. in growth, or lack thereof, it seems we are marching in “Lock Step” with China…
– Lower for longer will suppress the yuan. It’s one way China has of countering Trump’s tariff threats. But it’s also counterproductive.
> So they are worried about Tariffs? Hmm…
– Unfortunately, the only thing China seems to understand is growth by exports but that means a weaker yuan.
> The only growth China can anticipate, is from Exports, as the Countries People are “Broke”
Is my understanding wrong?
Deflation and low bond yield is not necessarily all bad.
China can print billions and billions, even trillions Yuan to support the whole economy and tech sector what China wants.
China can sell 100 years bond and pay low interest.
China can buy gold or bitcoin or whatever necessary with newly printed money if
he thinks the price will go up.
Said Yuan will get weaker. Isn’t it that China wants so that it can sell its products
competitively to West?
US and Europe can’t print much if economy falter because of inflation.
Yes, China has to be careful of debt accumulation.
If China frees the Yuan, would it strengthen, or actually just depreciate? Because if it is the latter then it might be a good solution
I wonder who is going to absorb China’s increased exports. The US doesn’t want to anymore and will put on tariffs and other barriers. Europe doesn’t want to replace the US as China’s preferred place to dump product and will put their own tariffs in place now that Germany has seen China develop their own products that Germany previously had sold to China. That leaves the Third World however China’s export juggernaut has also destroyed or limited industry in those countries too. There has been a deindustrialization of the Third World that in many ways mirrors that of the US. We see in those countries a swing towards services in lieu of industry and in the industrial sector itself the companies left many survive only by developing niches that often are only parts of other countries supply chains. The BRICS and China’s Belt and Road Initiative are both designed by China to enhance this trend but the Third World cannot absorb China’s surpluses anymore either so who is going to buy?
Very well stated IMO Doug! I totally agree that the US doesn’t want, or more appropriately can’t afford the junk anymore. The days of clicking “Buy” on Amazon are vastly coming to an end. People can’t afford the impulse buying any longer. It’s just so easy to buy pics of things… until the bill comes due!
The China business model has been to subsidize housing, and then allow the owners to borrow against the subsidized valuation increase. In other words, give them free money to own against a much higher true valuation, and then let them borrow against that phony surplus. Instant “Debt Slaves” but not homeless, and have skin in the game. Was not sure it would work then, and not sure if it will ultimately work out period but what’s done is done, so “The World” will soon find out…
Over the past 10 months, China’s and Switzerland’s 10-year bonds moved up in tandem. Most other assets classes reached all time highs, too. Now think about US 10 year bonds. Do they go down, because the dollar goes up and they get less affordable for the rest of the world? No, otherwise most other assets such as Gold and US equity should be down not up. Could it be that the trust in US bonds as reserve asset is declining, people are moving their money into alternative asset classes, the latter rise in value and the momentum creates additional demand for dollars? If the answer is yes, how far could this go before something breaks, or what could be done to stop it before?
Everything everywhere is going to fundamentally change. The economy and society the world over will be unrecognizable (to us) in thirty years. *No one* knows the right course of action.
The one thing we know about what’s coming is that flailing around trying to stop it with conventional means is pointless and probably destructive. But so far that is all that anyone has come up with.
China, Trump, Euro, Russia ….they all have no choice it seems but try to stop the future from coming because they are afraid of what looks like its outcome. And so they should be at least in regard to the transition period.
Whatever happens, in the end, there will be a lot less people left alive in the world. So there is that.
I don’t understand.
Re “avoid the economy sliding into a Japan-style balance sheet recession.”
Umm… it’s already there. Has been for a couple of years.
Too many people and institutions are still feeling the painful aftereffects of the huge (and hugely wasteful) housing bubble. And other malinvestments.
The demographics also don’t look so good.
Imperialist US are choking capitalist US. A fight between China and US made it obvious.
If they can’t boost domestic demand, might they not have to cut export prices – and mightn’t that offset the effect (on Americans) of Trumpian tariffs?