An external Chinese crisis is still one of my main possibilities for when this Fed tightening cycle ends. Today we can see why. A Chinese trade shock is brewing. Pantheon:
In one line: Another record trade surplus as reopening remains a one-sided affair
Export growth was driven by trade with the United States, up 19.3% yoy vs. 15.7% in May, and ASEAN, up 29.0% yoy vs. 25.9%, with exports to Japan also accelerating to 8.2% year-on-year from 3.7%. Exports to the EU, however, slowed from 20.3% to 17.1% year-on-year, likely reflecting the deepening energy crisis.
By product, preliminary data showed an acceleration in ship exports, up 16.5% year-on-year after a 21.5% drop in May, mechanical and electrical products, up 12.5% vs. 9.4%, and data processing equipment, which increased by 9.2% over one year. /year after falling 5.5%, helping to accelerate high-tech exports more broadly, to 7.4% year-on-year from 4.4%. Most other major categories experienced slower growth in June than in May.
Trends in country and product data suggest that the surprise strength in exports in June was driven by the continued catch-up in demand following the reopening of China, with regional supply chains still making up lost ground and attracting intermediate goods from China, while resilient US demand – and potentially restocking or hoarding given fears of new reopening bottlenecks – also provided some support. We also detect some seasonality in the data. According to our seasonally adjusted estimate, exports experienced a smaller increase, rising from 17.1% to 17.6%. The monthly momentum also slowed, with exports growing by 4.2% m/m, seasonally adjusted, against 5.5% in May.
We remain of the view that Chinese export growth will slow in the second half, although we admit that we have been wrong for longer than we would like. Data from other exporters point to slowing demand and China’s share of global trade remains high. The reopening boost has lasted longer than expected, but it cannot continue indefinitely.
Imports suggest domestic demand is not yet recovering
The trade balance received an unexpected boost from both sides of the ledger this month. Imports should recover faster than that if the economy reopens and demand returns. Instead, imports actually fell 0.5% m/m, seasonally adjusted, after rising 3.1% in May. Preliminary volume data showed year-over-year declines for petroleum, coal, iron ore, machine tools, semiconductors and soybeans, all worse than in May. Copper imports, at least, have picked up, suggesting some infrastructure stimulus effects, but weakness in iron ore indicates construction remains in a tricky spot overall.
Consumers, too, remain strained, and these numbers suggest continued weakness in upcoming retail sales data. The worst is yet to come, given the recent spike in Covid cases and the tightening of zero-Covid restrictions. Imports should not weigh on the trade balance next month either.
Domestic demand is still on the ass while the exterior is withering. The housing crash is to blame and it’s getting even worse:
More and more home buyers across China are refusing to pay mortgages as the properties they have purchased have remained unfinished due to the shortage of cash in the property sector.
As of July 12, buyers of more than 100 real estate projects in provinces including Hubei, Henan, Shandong, Jiangxi, Jiangsu, Hunan and Shaanxi had released statements saying they refused to pay the loans. mortgages because the properties they purchased remained unfinished, according to a report by the 21st Century Business Herald.
Among the projects, more than 30 are in central China’s Henan province and many are in Hunan and Hubei provinces, according to a report by Caixin.
Construction on the projects had been put on hold due to developers struggling with liquidity, meaning home deliveries would be delayed, forcing them to take action to protect their legitimate rights, the buyers said.
The developers of the real estate projects involved include China Evergrande Group, Sinic Holdings, Greenland Holdings, Sunac China, Kangqiao Group, Xinyuan Group, Sichuan Languang Development Co, Zensun Group and Myhome Real Estate Development Group, etc.
For example, buyers of a project developed by real estate developer Times China in Wuhan, capital of central China’s Hubei Province, said in a joint statement on July 7 that they had made several attempts to communicate with the developer and protect their lawful rights, but made no progress on the matter and construction was held in abeyance.
“If construction on the project does not resume by August 1, we will all stop paying mortgages,” the statement said.
The refusal to pay the mortgages in response to the delays in delivery reflects the lack of effective financial control of the linked banks, in particular over the pre-sale funds, which may have been diverted to meet the repayments of the debt of the developers or provide operating funds, they noted.
In their joint filings, the buyers accused the banks of granting mortgages before the main structure of the properties in question was completed, which violated related regulations; transfer mortgage funds to unregulated accounts; fail to ensure product safety of pre-sales, etc.
Most Chinese property developers rely heavily on proceeds from presales to secure their cash flow and the country has introduced regulations on the use of the proceeds to ensure property construction and home deliveries.
As early as 2003, China introduced related rules, under which “housing mortgages can only be granted to buyers when the main structure of the properties in question is completed” and “when funds from mortgages are diverted to purposes other than immovable”. construction, the banks have an obligation to bring back the funds.
Under rules passed in 2010, all presale proceeds must be deposited in custodial accounts and regulators are responsible for ensuring that presale funds are used for building construction.
Yan Yuejin, research director of the Shanghai-based E-House China R&D Institute, said that “the pre-sale product flows of the projects in question are murky and the regulations on funds were inadequate, which means, in to some extent, banks should be held accountable.
Notably, in February this year, it was reported that China was drawing up national rules to make it easier for property developers to access funds from sales still held in escrow accounts to alleviate a severe cash crisis in the sector. .
In April, China’s Politburo, the ruling Communist Party’s top decision-making body, voiced support for local governments’ decision to adjust property policies to stabilize the housing market and, for the first time, pledged to optimize regulations on real estate developers. presale proceeds.
Earlier data showed that by the end of 2021, delivery delays in 24 major Chinese cities accounted for 10% of the total in terms of retail space, according to real estate consultancy CRIC China.
In the most pessimistic scenario, delayed deliveries would represent 5% to 10% of the national total, according to data from CRIC, which puts the magnitude of potential mortgage defaults at between 360 billion yuan and 730 billion. yuan nationwide.
This would represent a default rate of 0.9-1.9% of the country’s total outstanding mortgage loans in the first quarter of 2021.
Banking crisis anyone? Yet the PBoC won’t hear of it. Goldman:
If you’re not concerned about capital outflows, you’re dead between the ears.