Chinese Renminbi vs S&P500
22-Aug-2023. Chinese Renminbi vs S&P500. Does anyone else remember the markets playing for the opening of the Chinese economy? Today's narrative is exactly the opposite ... which can be seen, for example, in the exchange rate of the Renminbi (USD/CNY), which is testing its lows from October 2022 (first chart). Stock indices look similar, e.g. Hang Seng & Hang Seng Properties - another chart. The Hang Seng Properties (HSP) Index is down -27% this year, while the S&P500 is up 15%. Since the beginning of 2021, the HSP is down -36%, while the S&P500 is only -8% (next chart).
CHY, EUR & JPY vs S&P500
12-Nov-2023. S&P500 vs CNY, EUR & JPY. Traditionally, longer periods of increase in the S&P500 should correlate positively with a weaker dollar, a stronger Euro and the Chinese Renminbi, as well as a weaker yen. And this was generally the case with CNY and EUR during the 25% decline of the S&P500 in 2022 (Chart 1), and then during the S&P500 rebound from the bottom in October 2022 to the recent top in July 2023. However, the S&P500's relation to CNY broke in May 2023, when investors finally realized that the "opening up" of the Chinese economy after Covid was not happening as expected - and in fact, problems with the local real estate market may prevent the economy from growing on a historic pace that investors have become accustomed to. In the case of the yen, it appears that the traditional correlation is currently not working well... in general as a result of "extremely" loose monetary policy (relative to the rest of the world fighting hard with inflation). Chart 2 shows the same relationships during the genuine global boom/expansion period in 2020-2022 (from the 2020 Covid recession bottom to early 2022). Today, it's worth watching whether the dollar will continue to strengthen, as well as the weakness of the yen and a possible increase in CNY above USDCNY 7.35 (i.e. weakening of the Chinese currency). And such a combination/development would rather suggest further declines in the S&P500.
Chinese oil demand explained
19-Sep-2023. Why is there so much demand for oil from China? Record crude oil processing and increase in crude oil inventories. In August, China's oil imports were 30% higher year-on-year and amounted to 12.5 million b/d. This is 3 million barrels per day more than a year ago (chart). Local oil production of about 4 million b/d is virtually flat. Therefore, any increase in demand must come through an increase in imports (see chart). These higher imports break down roughly 2 million b/d into refinery inputs, with the remaining 1 million b/d going toward inventory growth. China does not publish data on inventory levels, but the change in inventories can be estimated as the surplus of local production and imports over the volume of oil processed by refineries. Estimating the change in crude oil stocks in this way, this year alone, stocks increased by 202 million barrels (830,000 b/d) in 8 months - see the chart. China processed a record 15.3 million b/d of crude oil in August (+21% and 2.6 mb/d YoY). New refineries are partly responsible for this growth: Shenghong Petrochemical refinery in Lianyungang (320k b/d capacity), and PetroChina Jieyang refinery (400k b/d capacity).
Chinese Jan-2024 Inflation
8-Feb-2024. Today we got the Chinese inflation for January 2024. The headline inflation, or rather deflation, dropped to -0.8% year on year (the market expected -0.5%). The highest inflation level in the post-Covid period was 2.80% (September 2022). On a monthly basis, prices rose +0.3% in January (expected +0.4%). Figure 1 shows headline inflation comparisons for major countries. In the case of China's core inflation, we have a reading of 0.4% year on year. Figure 2 shows a comparison of core inflation for the major countries. For January 2024, we are only missing inflation in the US, which will be published on February 13, 2024, but earlier, on Friday, February 9, we will get the revision of inflation data, which may be at least as important as the reading for January itself. FOMC members (Waller and Powell) have recently been paying attention to this revision in terms of the decision on the upcoming first rate cut. Last year's revision resulted in a decrease in inflation in H1 and an increase in H2. The Cleveland FED inflation nowcast currently shows US inflation in January at a headline level of 2.95% (down from 3.35% in December 2023) and core at 3.81% (down from 3.90% in December 2023). Figure 3 also shows PPI inflation in China (today's reading for January 2024 is -2.50% YoY) against the background of American CPI inflation. The correlation between these series is 60.1%, which is better visually shown in Figure 4 (series on separate axes). Historically, this correlation was even over 80%, but from 2022 we have some decoupling of these series, what lowered the correlation calculated for the period from 2006 to 2023.
China vs Japan
10-Apr-2024. The Hang Seng Index rose almost 2% today and is already in positive territory this year. In contrast, the Nikkei 225 index is up over 18% this year - see Figure 1. The situation from 2019 looks even more interesting. Figure 2 shows the returns on the same indices since December 31, 2019. Recently, there has been a lot of talk about the scenario that China will face a "lost decade" - just like it happened in Japan after the bubble burst in 1989. In this context, one may wonder why the Japanese yen has weakened against the dollar by 40% since 2019, and the Chinese renminbi by only 4%. Figure 3 and 4. Will we see a (larger) devaluation of the Chinese currency? This is one of the ways to "regain competitiveness". Additionally, we would have Chinese deflation exported to the rest of the world… Real estate prices have also looked much better in Japan than in China in recent years - see Figure 5.
who's drinking Kool-Aid?
18-Apr-2024. Chart of the year... who's drinking their own Kool-Aid? An interesting chart indicating a potential place for an (orderly) devaluation of the Chinese currency. How to help the local economy? You can stop publishing the youth unemployment rate*, or copy your neighbor's idea and devaluate your own currency. To improve your competitive position, you can either devaluate your own currency (external devaluation), or reduce real production costs, including wages, or increase productivity (internal devaluation – more “painful” for society). No need to mention that a possible devaluation of the yuan could have far-reaching consequences for investors... * China stopped publishing the jobless rate for people between 16 and 24 in 2023, when this rate reached 21.3% in June 2023. Then it returned to publishing it from December 2023, but according to the new methodology (for December 2023 it was only 14 .9%).
Chinese personal consumption
31-May-2024. China vs. USA: personal consumption The American consumer consumption is as much as 68% of GDP, while in the case of China it is only 37%. For many reasons, China is unlikely to be able to even come close to the structure of American GDP, because the Chinese consumer would ultimately have to consume almost twice as much as today. Figure 1 shows a comparison of the GDP of China and the USA according to the share of individual components. Americans use a different methodology than the rest of the world and instead of Gross Fixed Capital Formation we have Gross Private Domestic Investment. One of the main differences concerns Gross Government Investment, which in the American approach is in the government spending component (specifically “Government Consumption Expenditures and Gross Investment”). After moving Gross Government Investment to GPDI, we get Figure 2. But the key message is China's different GDP "model", where consumer spending is relatively small. Additionally, when we look at Chinese retail sales… they changed the trend after 2020… see Figure 3 and Figure 4. Figure 4 shows Chinese retail sales as a rolling sum of last 12-month (TTM). Clearly, after 2020, there has been a “change in trend” and the Chinese consumer is now “spending less” than before Covid. The Chinese consumer is certainly also influenced by the falling house prices (and stocks on the capital markets). And in the USA, stock and house prices are rising, and the consumer himself is doing quite well in terms of his expenditures... see Figures 5 and 6. Key takeaway: to sustain economic growth, China must rely mainly on exports and investments (Gross Capital Formation), and exports seem to be the most reasonable option... including the probable devaluation of the Chinese yuan.
Chinese home prices
20-Jul-2024. Is China facing a lost decade? Just like it was in Japan after the bubble burst in 1989? If we look at the Chinese real estate market and falling housing prices, and at the similarly falling prices of Chinese stocks, we can say that something is probably going on. According to the latest data for June, housing prices in China continue to decline. In the case of newly built residential buildings, prices fell in June by an average of 0.67% MoM (in the 70 largest cities). In the case of apartments on the secondary market, prices fell in June by 0.85% MoM (in the 70 largest cities). From the market top in 2021, price drops are already 6.94% (primary market), and on the secondary market by 12.8%. Similarly, according to quarterly BIS data, apartment prices have already fallen by 9.9% (until Q1 2024). See Figure 1. After the real estate bubble burst in 1991 in Japan, housing prices fell for 18 years and dropped overall to a trough in Q2 2009 by 46.5% (BIS data). Chart 2 shows housing prices in Japan since 1955, including housing prices in China (2021 market peak in China = 1991 market peak in Japan).
