In 2018, we’ve written a lot about the threat of a US-China trade war. While both countries have been laying down tariffs against each other for most of this year, it looks like China might finally be feeling the pinch.
China’s current economy has slowed down so severely, they haven’t seen it like this since 2009.
China’s third-quarter growth was only up 6.5% from a year ago, according to the National Breuer of Statistics.
This is quiet the drop, compared to the year-on-year growth of 6.7% in the previous quarter.
So that brings growth to 6.6% over the calendar year. Outdoing the government’s target of 6.5%, so it’s not all bad news.
And while the tariffs have yet to impact China negatively, they are speeding up their exports to key trading partners.
China’s stock market is falling
But it’s not only China’s growth and a looming trade war that is worrying the Chinese economy and investors. Since the beginning of 2018, Chinese stocks have lost over 30% of their value. In turn, this has seen the benchmark Shanghai Composite index fall to its lowest level in four years. This shows that investor confidence in a booming China is waning.
The fall won’t be of a huge magnitude though, with the outlook still strong and steady just not booming like it has been for the last few years.
Earlier this month, JP Morgan even projected that the impact of the trade war could shrink the Chinese economy by 1%.
With the trade war threat and a declining economy, Chinese stocks could be faced with a dooming prospect: forced selling. Meaning, Chinese stocks would fall into bear market territory.
It is not unusual, in fact it is practiced by hundreds of Chinese companies, to use their shares for collateral for loans. So what happens when share prices fall? Well, these companies are forced to sell. This helps them to maintain a balance in their brokerage accounts. This is then used to lend companies money.
According to Business Insider, Bloomberg noted that:
‘About 4.18 trillion yuan ($US603 billion,) worth of shares have been put up by company founders and other major investors as collateral for loans, accounting for about 11% of the country’s stock market capitalisation, based on calculations using China Securities Depository and Clearing Corporation data.’
And the South China Morning Post reported on Sunday that 600 company stocks have fallen, so low that they may be forced to sell off.
Wang Zheng, chief investment officer at Jingxi Investment Management said that:
‘It’s a vicious cycle: share drops lead to liquidation and liquidation leads to further share drops…
‘The recent declines, particularly in small caps, are blamed for the problem arising from share pledges.’
China’s plan to address the slowing economy
So what does China plan to do to increase spending and the economy as the boom finally comes to a close?
On Saturday, 20 October, State Administration of Taxation announced a proposal allowing claim deduction of six different types of expenses. This is in addition to pension and insurance contributions. Plus the monthly universal allowance of 5000 yuan (US$720).
So who will the six new tax expenses benefit?
- People with serious illness
- International residents
In a parliamentary meeting back in March, the Chinese government made a promise to cut 800 billion yuan in taxes for both individuals and companies.
But Tang Beibei, a legal consultant at an American firm in Beijing, warned that this may not help increase consumer spending like the Chinese government would lead you to believe:
‘The measures on education, health care and elderly care are all relevant to people’s lives, but I don’t think they go far enough, with rents rising sharply in Beijing and mortgage rates also going up…
‘And given all the usual red tape, it might not be so easy for people to claim the allowances they are entitled to.’
In the last five years, China has been enjoying a booming economy and a rising middle class. But that boom seems to have stagnated and growth seems to be beginning to decline.
This week in Money Morning
In Monday’s Money Morning, Harje discusses how bank tellers in China are afraid of digital change. Yet it’s got nothing to do with bitcoin. What keeps most of them up at night is a small device in their pocket: their smartphone. Within most Chinese smartphones is a very important app. Maybe you’ve heard its name before. It’s called WeChat. (It’s a hub, where Chinese users do anything and everything from.) And in a society where the number of mobile phone subscriptions outnumbers the population, it makes sense why banks might be a little nervous. WeChat users can do everything on their mobile that a brick-and-mortar bank offers. Harje argues this is an inevitable move. Either the banks are going to get help from companies like Tencent and Alibaba, or consumers are going to vote with their dollars and move online. To find out more, go here.
In Tuesday’s Money Morning, Harje discusses how China is slowing down, their markets have been declining all year (Shanghai Composite down 20% and Shenzhen down 34%). All up, investors lost about US$3 trillion on Chinese stocks. And it might get even worse from here. The worry is if stocks fall further, then it may trigger more selling. As borrowers default on their loans, banks will have to sell the collateral (shares) to recoup their investment. Their market doesn’t go up as much as ours. And sometimes it drops A WHOLE LOT. But this is the attraction. Every so often in China, most if not all stocks will go on sale. To find out more about the current state of Chinese stocks, go here.
On Wednesday, Harje discussed big money. Like super funds and endowments. Because of their size, these multi-billion-dollar funds move markets whenever they do anything. Among university endowments, Harvard is top dog. It’s the largest university endowment fund in the country, with US$37 billion in assets. And while some of that has come from investment returns, another chuck is from alumni gifts. In 2017, Harvard received US$500 million in gifts. They also received pledges (promises of a gift) of close to US$2 billion. But not all universities are like Harvard, some are getting gifts in bitcoin. A recent graduate from Puget Sound hit the jackpot. He made an early investment that skyrocketed his wealth. Like anyone with too much money, he decided to give some of it away. So in an effort to show his gratitude he sent Puget some bitcoins. To find out more about this, go here.
In Thursday’s Money Morning, Harje looks at why 2018 is so different from other years. There is so much more debt in the system. We also have a power struggle playing out in the open between the US and China. Harje recommends to investors to do what Howard Marks suggests. Take less risk. He says investors shouldn’t buy a company laden with debt. Don’t put all your money into the stocks with a PE of 50. Make calculated bets on companies you understand and will pay off over time. To find out more about what Harje recommends for investors, go here.
In Friday’s Money Morning, Harje discusses why short sellers must be rubbing their hands with glee. This is when you borrow stock you don’t own and sell it in the market. You hope it will go down, so you can buy back the stock at a lower price and redeem the lender. Anything they’ve touched on the ASX yesterday has gone down. Of the thousands of stocks on the ASX only one hit a 52-week high. 147 others hit 52-week lows. To find out more about Harje’s views on short selling, go here.
Editor, Money Weekend
PS: The growing Chinese middle class could translate into a massive investment opportunity for Australians. Get the details here