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– We can only state that the Chinese economy has serious challenges, says Sparebank 1 Markets’ chief economist Harald Magnus Andreassen.
2023 was the year in which China would rise from the pandemic and save the world economy. Instead, it is the United States that has pulled the load, while the Chinese authorities have hammered out a long series of disastrous key figures.
It is widely expected that China’s central bank will cut the most important lending rates Monday, after another key interest rate cut last Monday. China is struggling with a debt-ridden property sector, weak domestic demand and record youth unemployment.
Andreassen points to three main challenges:
The trade war between the US and China has escalated with new investment and export restrictions, particularly on the technology side. Foreign direct investment in China has fallen by 90 percent since before the pandemic, most of which has occurred in the last two to three quarters. ·The authoritarian political regime, ruled with an iron fist by Xi Jinping, hardly has the ability or the will to solve economic problems at home, probably not even relations with the rest of the world, believes Andreassen. The investment-driven Chinese growth model may have hit the wall. Housing construction, which has been an important engine of growth for China, has collapsed by 65 percent in just two years. The fall itself corresponds to four years of US housing construction.
– In modern times, we have never seen anything like it. The fall in housing construction is the biggest fall since we stopped building pyramids, at least in peacetime, says Andreassen.
Cocktail
But what will China’s problems mean for the West? Andreassen describes China’s triple crisis as a “cocktail that is a bit unpleasant for the world economy”, but at the same time notes that the financial ties between China and the rest of the world are not that strong.
– The good news is that several negative things have happened without causing serious damage. The fall in housing construction, for example, has not crushed commodity prices. This is worst for the Chinese, who have driven a growth model to the end of the road.
Chinese housebuilders with a total debt of several thousand billion now have enormous problems. China Evergrande Group, which was China’s largest real estate conglomerate, filed for bankruptcy protection in New York on Thursday. The group had debts and liabilities of NOK 3,500 billion at the turn of the year.
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– In the Chinese real estate sector, there will be a bloodbath for everyone involved, but it need not have major consequences for the rest of the world. In rich countries, the problem is that demand is too strong, unemployment too low and wage growth too high. China obviously contributes to lower commodity prices, which is good for the world economy, says Andreassen.
SEB’s head of analysis for interest rates, Thomas Eitzen, points to China as one of the reasons why the markets have been a little nervous in recent weeks.
– From the outside, we think that the Chinese politicians can only decide and solve everything, but then it turns out that this is not the case. All this makes you wake up and ask yourself: Is China an engine of growth, or a nightmare?
In an index of Chinese real estate companies’ dollar bonds, 75 percent of the bonds trade at less than 50 percent of the rate at which they were issued, which is a form of bankruptcy pricing.
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– These are probably the more solid property companies, so you can imagine how things are going with the others. To say something reasonable about the state of China is very difficult, but now we are there that we are worried again.
Eitzen emphasizes that the capital markets do not appear particularly troubled. Both the interest rate, credit and stock markets are currently pricing in sunny days.
– For the capital markets, China in isolation is unimportant, but the world economy may not get the traction that was hoped for, he says.
– Unlikely
This week, the market will also focus on Jackson Hole, where the US central bank will hold a summit meeting with other central banks. The highlight will be Friday’s speech from central bank chief Jerome Powell, which could potentially be decisive for the markets.
Recently, the “long” US government interest rates, i.e. the interest on US government bonds with longer maturities, have risen sharply. The ten-year interest rate is often referred to as the world’s most important interest rate, because it affects almost all other interest rates and financial figures worldwide.
The ten-year real interest rate, which is the ten-year interest rate minus expected annual inflation, has in two years risen from -1.0 per cent to 1.9 per cent, which is the highest level in 15 years.
The price of money has thus become much higher – and Andreassen believes that parts of the market have turned a blind eye to this.
– If there’s anything I’m concerned about right now, it’s precisely this. I am still waiting for the effects of the fact that the real price of capital has changed by three percentage points, at the same time that credit spreads on all types of debt have risen. It is inconceivable to me that the full effect has been taken out. You saw a repricing of the growth companies, but the stock market found a solution to that: Artificial intelligence.
– And you don’t believe that story?
– I believe that artificial intelligence will contribute to good productivity improvements, as all technology has done at all times. But I consider it highly unlikely that the entire gain will accrue to a small number of large American companies. If that happens, it will be regulated by the authorities. It lasts as long as it lasts.
– One of the two is wrong
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Andreassen looks at several different ratios when assessing how expensive US stocks are. One of them is so-called price/book, which shows the relationship between the company’s market value and the book equity.
Another is the Shiller PE, where the market value is measured against the inflation-adjusted earnings over ten years. It gives a picture of what the companies “normally” earn.
– When we have observed the two benchmarks at these levels before, the real return for the next ten years has been around the zero line. The market is not super expensive, but it is expensive. Oslo Børs is in the middle of the tree, says Andreassen.
US unemployment is very low and economic growth has held up, interest rate rises notwithstanding. According to the Atlanta Feds real-time model this quarter, the American economy is set for an animalized growth of 5.8 per cent.
However, Andreassen believes that economic growth next year will be equal to zero, and points out that so-called leading indicators point to a coming downturn. At the same time, the analysts estimate that the companies’ earnings will increase by 12 per cent.
– One of the two is wrong. There are many more microeconomists than macroeconomists, so we can hope that reason is among the masses and not among the few, says Andreassen. (Terms) Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using links, which lead directly to our pages. Copying or other forms of use of all or part of the content may only take place with written permission or as permitted by law. For further terms see here.
2023-08-20 17:42:58
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