Letter To Shanghai No 1148 - A journey that will take some time to complete

As anticipated in the previous letter, the PBOC and the NBS released around ten potentially market-moving data points across Friday and Monday. I have no room here to discuss them all, so I will give you the considered opinion of ING. "There were mixed signals from the early data (Friday), but we can confirm several trends. First, overall economic momentum has remained soft in the first two months of the year, necessitating additional need for stimulus. Second, real estate will remain a drag on the economy this year, and other investments will need to pick up the slack. Third, a slowdown in retail sales illustrated that it will be difficult to rely on consumption alone this year to achieve the 5% growth target." Despite this initially gloomy picture the report paints at the outset, it goes on to say, "Value added by industry saw a solid start, up 7.0% YoY in the first two months of the year, continuing a recovery that started in 4Q23. This recovery was significantly stronger than expected. By industry, the main areas of strength were seen in the 'computers, communications, and other electronic equipment' category, which rose 14.6% YoY YTD. Transportation equipment manufacturing also performed strongly, rising 11.0% YoY YTD".

We should therefore recognise that China has a two-speed recovery; areas, for example property, that are not recovering at all or indeed moving down and those high-tech areas that are speeding towards growth. The Western media, in line with several Western political commentators, tend to take the view that the Chinese economy is close to collapse, that genuine growth is significantly below the official data, and that price falls in the housing market, which is yet to stabilise, are devaluing household wealth. Indeed, deflation and negative wealth effects are driving a lack of consumer confidence so that overall, as time passes, chaos will ensue.

However, what have we learned in the last 2 years? Well, I think it's clear Beijing has no meaningful interest in retail demand management. Put simply, from a Beijing perspective, US Fed-style one-size-fits-all rate cutting enables the wrong people to get rich and runs contrary to the ideas of common prosperity. And further, there will be no gambling with imported inflation via a weak currency. What Western media perhaps fails to recognise is that Beijing is all about responding to the US technology blockade. China's industrial policy provides critical financial support to China's high-tech industry, especially solar panels, electric vehicles, telecommunications equipment and electronics. Which are exactly the sectors that the data is telling us are expanding. In the consumer sector, by observation, we might say that Beijing is currently pursuing a policy to flatten the income and wealth disparities that have followed the reforms of Deng Xiaoping laid out in the 1980s. Common prosperity requires that those income disparities should narrow.

That house prices have fallen is not high on the agenda of Beijing, after all, "houses are for living in and not for speculation." However, extending support to those trapped in paying for unfinished apartments because their developer has collapsed is high on the list of things to do. Therefore, Beijing's support will continue to emerge within the boundaries we have seen throughout the last year. It will be sector-specific and target regions, groups or communities under pressure, while those sunrise industries that deliver China's independent high-tech development, as we have seen in the data, will continue to see the full effects of Beijing's generosity.

From a Western perspective, which originates in the cradle of Central Bank demand management, the recent Chinese data numbers may look disappointing, but from a Beijing perspective, the opposite is true: if these were chess moves, they are solid steps along a journey that will take some time to complete.

Have a good day

John