Where The Stimulus Is Hiding: China's Fiscal Push Is Now Bigger Than After The Global Meltdown
Last week we reported that as a result of some rather vocal chiding by both the IMF and G-20, China was finally forced to deflate, if not outright burst, its housing bubble using various measures to curb unprecedented demand for real estate, and the nation’s third housing bubble in the past five years.
Here is a quick bullet recap of the key quandaries facing Beijing as it seeks to bring the local housing market to another “soft landing”:
- Housing Mania Unhealthy; Enter Beijing: New all-time high. All stats look similar. Scary
- All will notice price data peaking
- Tier-1 vs. Tier-2 vs. Tiers-3,4, more.
- How to??? ‘Boil’ — to ‘Simmer’ — not to ‘Cold’
- Beijing – has been timid in tackling to date
- Now — coordinated multi-cities – ad hoc rules
- Not big up Starts, Investment in 2016; down 2017
- Not big driver of hard commodity demand
- Home equity — China #1 Consumer Wealth item
As bullet point 4 lays out, the big problem for China is how to avoid going from boiling hot to just tepid, and avoid crashing its housing market outright. To elucidate this point we highlight an excerpt from the latest weekly letter by One River’s Eric Peters:
“There’s no real choice for people now, they invest in property or they get their money out,” continued the same CIO. “Think about the two growth components; investment and consumption.” The latter is doing ok in China. Investment is divided into roughly 33% government infrastructure, 33% corporate capex, and 33% property investment. “Capex is now negative, and the government controls infrastructure spending, so now there’s only property investment left.” And if Beijing now limits property investment, money will leave China.
Needless to say, Beijing is rather desperate to avoid even more money leaving China, which underscores why orchestrating a “just right” slowdown in the housing market will be so critical.
Furthermore, this being China, it couldn’t leave the population out cold Turkey, and had to provide an alternative asset bubble to keep the locals entertained until the housing market returned to a more realistic level. As we reported last night, it has done so by shifting the massive stimulus out of housing and into autos. As we reported last night, this dramatic surge in car purchases is not due to organic demand, but is the result of a tax cut (by half) on small engine cars implemented by the government in September 2015. Since the cut, China’s auto sales have increased by 33%. Think cash for clunkers on trillions of debt-funded steroids.
However, while China’s penchant for rolling bubbles over from one asset to another is nothing new and was profiled here as far back as 2010, one thing does stand out: the reason why the global economy has managed to avoid a sharp deterioration in recent months. It has all to do with, drumroll, China.
As the following chart shows, while many were wondering if China would unleash QE (which it has been effectively doing for years, using various liquidity conduits), Beijing has quietly launched the biggest fiscal stimulus in history, one that is even bigger than 2009-10, following the global meltdown.
According to Evercore ISI, the size of the stimulus is a whopping 4.5 – 5.0% of GDP in 2016, as a result of which there is “no backing away” and expects a “similar push in 2017.”
- Same trusted playbook — Borrow and Build
- Infrastructure is key — All components thereof
- Excess debt and leverage – A secondary matter
- Central gov’t initiatives – can be hard to implement
- Entangled Central, Provincial, Muni gov’ts
And here, in all its glory, is how China allowed the world to rebound from the global growth scare in late 2015, when a confluence of economic and market events (mostly out of China), nearly derailed the central banks’ greate “wealth effect” experiment of the post-crisis era.
What is more troubling is just how little of China’s fiscal stimulus has made it to either the US or the rest of the globe. The reason for that is the collapse in global trade and commerce, something we have also flagged over the past 5 years as a direct consequence of monetary policies targeting the cost of money, and encouraging stock buybacks and dividends instead of capital investment, R&D spending and generally focusing on growth instead of return to (loud, vocal, activist) shareholders.
We leave it up to readers to decide what happens once this latest Chinese unprecedented fiscal stimulus comes to a screeching halt.