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Daily Archives: July 16, 2022

G10 Currency (Percentage Change) vs. USD since June 1, 2021

Source : Bloomberg and Trading Economics

In Pictures: 1949 Alfa Romeo 6C 2500 Super Sport Cabriolet by Pinin Farina

Source : Bring A Trailer

China’s Lockdowns Are Fueling Record Growth — in Inequality

Luo Meihan wrote . . . . . . . . .

As Shanghai emerged from lockdown in late May, many of the city’s wealthiest residents headed straight for the same store: the Hermès outlet at the exclusive Plaza 66 mall. Long lines formed outside the entrance, as people indulged in their first shopping spree in two months.

Mary Men’s experience was nothing like that.

The 34-year-old spent her first post-lockdown trip in a local supermarket — making some painful choices. For the first time in her life, she found herself studying the price tag of every item before adding it to her basket. She ended up spending just 15 yuan ($2.25) on a box of blueberries, whereas she used to like buying a whole selection of different fruits.

Like much of Shanghai’s middle class, Men struggled financially during the citywide lockdown in April and May. A marketing executive at an import-export firm, her 6,000 yuan after-tax monthly salary already barely covered her mortgage payments and other bills. Then, the shutdown sent food prices skyrocketing — and pushed her into the red.

The experience has forced Men to cut back. She no longer uses her credit card to shop online. Instead, she’s laser-focused on building up her savings, in case the city’s virus controls ramp up again.

“During crunch times, having money in your hands is the most important thing,” says Men. “You had to directly use money from your savings to buy pricey food (during the lockdown).”

Men is far from alone. As China tries to move on from a wave of spring lockdowns, there were hopes that consumers would kick-start the economy by indulging in the kind of “revenge spending” seen at Shanghai’s Hermès store. In reality, the opposite has happened.

Many consumers have emerged from lockdown in a pessimistic mood. Anxious about their personal finances, the precarious state of the economy, and the prospect of further lockdowns, they’re following Men’s example: making deep cuts to their household budgets and saving as much as they can.

That’s because — as has happened elsewhere — China’s lockdowns haven’t affected everyone equally. While wealthy Chinese have ridden out the pandemic with relative ease, a large number of working- and middle-class families have faced job losses and steep drops in income.

A recent survey offers a stark picture of rising inequality. China’s poorest households have seen their wealth decline every quarter since the pandemic began, according to the April report by the Southwestern University of Finance and Economics and Ant Group Research. The country’s wealthiest households, meanwhile, have gotten richer and richer during the crisis.

China’s consumption data reflects this trend. Sales of luxury goods have grown at double-digit levels year-over-year since 2020, according to consultants Bain & Company, putting China on track to become the world’s largest luxury market by 2025.

“The high-income group go for luxury goods partly with the aim of preserving and increasing their assets,” says Ye Min, an executive partner at consultancy PwC in China. “Their consumption is often for the purpose of investment.”

But from a wider perspective, things look very different. During the first five months of 2022, consumers spent more on daily necessities like food and beverages compared with last year, according to official data. But they cut back spending in many other areas, including cosmetics, jewelry, clothing, furniture, cars, and dining out. Total retail sales were down 1.5%.

Consumers’ reluctance to spend is a major headache for Chinese policymakers, threatening to drag down economic growth and fuel unemployment. But it’s also a tough problem to fix — especially as cases of the highly-infectious Omicron subvariant BA.5.2 have emerged in some Chinese cities, bringing the risk of more lockdowns.

Pinching pennies

Mu Cong, a Shanghai-based piano tutor, is one of many middle-class Chinese who have radically altered their spending habits this year.

After he was locked down at home in late March, Mu’s monthly income fell by 70%. Online piano classes were a tough sell, and he barely earned any class fees to supplement his 4,000 yuan basic salary.

“When I had a stable income, I preferred to enjoy myself,” says Mu, who spoke with Sixth Tone using a pseudonym for privacy reasons. “But as I spent more than I earned during the lockdown … I started to feel nervous, and felt the urgency to save more.”

The 22-year-old is now cutting down on non-essentials like coffee, home decorations, and new clothes. When he wants to buy something online, he first adds it to his shopping cart for a while — to allow himself to think twice before hitting buy.

“If you are thinking about whether you need it or not, it’s not essential,” says Mu. “For example, you wouldn’t hesitate to buy toilet paper. I’m giving up things I don’t actually need. It gives me a feeling of control over my life.”

Men, the marketing manager, has embraced a similar austerity drive. In late May, she took a higher-paying job and told herself she should save at least 30% of her salary each month.

“I didn’t worry much about money before,” says Men. “But now that I’m spending the money I have saved, every penny spent is a penny less.”

Adjusting to a new lifestyle hasn’t been easy, Men says. She has halved her living expenses to less than 1,000 yuan per month. She now rarely eats out or orders takeout, buys very little online, and commutes by subway instead of driving to the office.

“When I’m greedy for takeout, I scroll through several online food delivery platforms and look at different options many times, but don’t order anything,” says Men. “It is a bit painful at first to control yourself, and not spend the money you have.”

China’s migrant workers — who represent around one-third of the country’s workforce — have been hit even harder, as many of them fall outside the country’s welfare system.

A survey of migrant worker households by the nonprofit Beijing Social Work Development Center for Facilitators in April found that 73% had experienced salary cuts due to the recent outbreaks. Around 45% said their work had been affected even more than during China’s initial COVID-19 outbreak in 2020.

Li Tao, the founder of the Beijing-based nonprofit that published the survey, says many migrant worker households are having to cut back even on essentials, such as by adding fewer vegetables to their meals.

“They’ve largely run out of savings after the repeated outbreaks of the past two years,” says Li. “Plus, while the majority of respondents were optimistic about the COVID-19 situation in early 2020, now over 70% are anxious that the pandemic will continue to impact their household income.”

An uncertain future

Many middle-class Chinese share these concerns. The widespread expectation of more COVID-19 outbreaks — and lockdown restrictions — in the future is casting a longer shadow over consumer confidence than two years ago.

Mo Na, a self-employed headhunter, says that Shanghai’s monthslong lockdown has taken a heavy toll on her business — and her mental health. She used to spend thousands of yuan a year on cosmetics, but now she has stopped buying them completely.

“Being confined at home for months traumatized me psychologically and made me lose interest in cosmetic products,” says Mo, who also used a pseudonym for privacy reasons. “It’s meaningless consumption. It makes more sense to save money and invest it.”

Fearful of another lockdown, Mo also plans to shut down her business and apply for an in-house human resources job at a larger company. Although the salary would be far lower than what she earned as a headhunter, she feels she needs some stability.

“Since the outbreak, I’ve lacked a sense of security,” she says. “I don’t know if something worse will happen in the future. I don’t have the confidence to spend money — who knows if you’ll be locked up again for a few months?”

Mo is far from alone. Chinese financial authorities are witnessing record surges in household savings, as consumers adopt a defensive crouch.

A June survey of urban Chinese bank depositors by China’s central bank found that people’s confidence in their future earning potential was at its lowest level since early 2020. And a record number of respondents — 58.3% — said they intended to increase their savings, rather than their spending or investments.

The central bank’s financial data shows the same trend. During the first half of the year, China’s household savings rose by 10.3 trillion yuan — also a record — while new household loans fell to a seven-year low.

Gu Yue, a Shanghai-based new media editor, was planning to buy an apartment last year. But she has now ditched the plan, after the lockdown made her fear tying up her money in a mortgage.

“It could easily cost over 1,000 yuan to buy just a few things (during the lockdown) … It was like having your money flushed away every day,” Gu says. “Buying a house is not necessary. Having money in your hands is.”

Fixing the problem

For Chinese policymakers, stimulating sluggish consumer spending is an urgent priority. However, it’s also proving challenging as the country continues to implement tough virus-control measures.

So far, China’s stimulus policies have been relatively restrained. Unlike some major economies, it has avoided giving cash directly to consumers. Instead, it has focused on supporting embattled businesses and boosting the economy through massive investment in infrastructure projects, and hoping this trickles down to the consumption sector.

Some local governments, including the capital Beijing, have issued “consumption vouchers” to residents to fuel spending. But experts say handing out cash subsidies to ordinary consumers — especially those in low-income groups — will have a greater effect.

Economists, however, stress that much will also depend on the government’s COVID-19 policies. Dan Wang, chief economist at Hang Seng Bank (China), says consumption in Shanghai is likely to rebound to similar levels seen in 2021 by the end of the year — as long as the city can avoid further lockdowns.

“The key to ensuring income sources for low-income people is to find a targeted and long-term mechanism to cope with COVID-19 outbreaks,” says Wang. “A citywide lockdown must not happen again.”

“The recovery of the consumption sector depends on how the epidemic evolves … and when residents’ future expectations for job security, income, and the ease of travel improve,” says Tommy Xie, head of Greater China research at OCBC Bank.

Men, the marketing professional, agrees. For now, she feels she has no choice but to save as aggressively as she can. Her employer is already showing signs of financial strain. And she has a mortgage, health care costs, and aging parents to think about.

“I need to give myself some security,” she says. “No one knows what will happen tomorrow. Things can change at any time.”


Source : Sixth Tone

Infographic: iPhone Components Are Developed All Over the World

Source : Statista

How Long and Deep Is Inflation, and How Close Is China to a Banking Crisis?

Bill Blain wrote wrote . . . . . . . . .

“ All that glitters is not gold…”

This morning: The immediate threat is inflation – how could a strong CPI print destablise markets, but inflation is also a question of what shocks are still to come, and investing accordingly. What if a big No-see-Em shock is still to come – a Chinese financial crisis?

Markets are all about risk – What do we know, and what do we not? That’s easy – we know what we care to learn about the past, what we think we know about today, but about tomorrow we are just making informed guesses.

Today the big front and centre issue is inflation. Does it get worse or better, and for how long?

Take a look at any inflation chart and it will typically shows a series of sharp, short-lived spikes – which makes sense: something triggers inflation, it is addressed and the economy adapts, the price shock is normalised as the economy learns to cope with the new normal.

The immediate critical risk is another new shock; that a stronger than expected US CPI (inflation) report triggers major wobbles across markets by raising expectations of aggressive central banking rate tightening – that’s given some impetus by the comments of Bank of England governor Andrew Bailey who said :“bringing inflation down to the 2% target is our job, no ifs or buts”. The market expects a 50 bp Bank hike in early August – there is little else left in the Bank’s armoury.

The market is split on where the inflation threat goes from tomorrow:

  • There are naysayers who say trying to address the multiple inflation shocks now hitting global markets with recession inducing monetary tightening is just daft.
  • There are others who say it’s all the fault of the overly-easy monetary experimentation of artificially low-rates and QE of the last 14 years: inflation everywhere is a monetary phenomenon. (Inflation is very real and it has enormous socio-economic consequences.)
  • There are some market watchers who believe inflation already peaked, and June will mark a high for this inflationary spike as the economy successfully adapts and digests the Ukraine energy shock and the end of pandemic supply chain crisis. They argue there is significant resilience built in that will ease tensions.
  • There are others, including myself, who believe inflation could yet spike higher, and could remain persistently higher for longer than central bank dot-plots suggest. The energy crisis is not over – and could get substantially worse if Putin does not reopen the gas valves to Europe (currently closed for “maintenance”) later this month. Coronavirus lockdowns in China remain a threat to keep supply chains malfunctioning, and growing wage-inflation as industrial unrest ferments across Europe is going to hit hard in Q3/4 as recession bites.

What’s a fund manager to do? Inflation hurts earnings – as this current earnings season will no-doubt show. Interest rate rises will hit stock returns, balance sheets and prices. One argument is to buy stocks in the expectation the economy will adapt while strong fundamentals re-establish themselves.

On Monday there was a fascinating intervention on the inflation conundrum for asset managers from retired bond king Bill Gross – reminding us bonds diminish risk but lower returns.. “Jim Cramer famously says there’s always a bull market somewhere but I’m straining to find one now.” Gross goes on to say investors should mitigate the pain, accept its happening and “12 month Treasuries at 2.7% are better than your money market fund and any other alternatives!” He has a point – although others say this is time to buy duration to up the return to 3%!

On the other hand, maybe there is more pain to come? Maybe it will be Europe where Euro parity to the dollar is doing precious little to boost economies heading into a new recession, where energy security is perilous, and politics looks a-dither.

And, there are growing signs all is not well in China..

There is a widely held view Paramount Leader Chairman Xi feels so secure, and the distracted west looks so riven, it’s time for a quick operation to seize Taiwan. Maybe not – the Chinese, who share tactical doctrines with the now discredited Russian steamroller, look embarrassed by its shortcomings. For all its’ military posturing and new weapons, the Chinese are not an “outward bound” empire – historically, they prefer to internalise. The spectacular growth of China over the last 30 years has come from the internal control and expansion of its domestic economy, initially through exports and now through domestic consumption.

That’s bound to have created internal tensions – which can be seen in terms of inequality, environmental damage, and the limitations on internal freedoms – all of which we know..

But, over the last 2 years of Covid, China has effectively sequestered itself from the global economy. We think we understand how it works, but in reality… do we? Look at how dramatically and swiftly Hong Kong has been spun from being the premier western entrepot into a kow-towing domestic city.

China is big and it matters. It is like and unlike the west. It has multiple growth problems and demographics that will trigger whole new issues the West has yet to adapt to. The Covid lockdowns, understanding of the Party and government, and now bursting economic bubbles and what looks like a developing banking crisis – I’m beginning to wonder if the Middle Kingdom is more trouble than we think? If so it will have enormous global consequences – it could be a massive No-See-Um that could destabilise the global economy.

I’ve been reading up on the Chinese Banking riots in Henan Province. The fact Chinese protestors wanting money back from local banks following a run were set upon is hardly unusual – the immediate suspicion is corrupt local politicians were protecting themselves. But there are two aspects to the story to consider:

The first is Chinese Surveillance Capitalism: clamping down on reporting, using unidentified security personal to beat up and break up protestors, and local officials manipulating Covid “personal health codes” to ping protestors as likely Covid carriers takes state-control to a new level. Observers are not surprised – they saw the mandatory health codes as a way in which Government could control the masses. If surveillance capitalism is so established – why is party corruption still such an issue?

The second is the scale of the domestic banking problem. Is it really just a local, one province problem? What are we not seeing? Could it be the whole Chinese banking system is teetering?

The official line is it’s a local banking problem caused by criminality, presenting the line “local gangsters” have been systematically looting some small banks after “capturing” them up to a decade ago – which sounds like bad regulation and incompetent bank inspection. But runs on banks and lines of people asking for their money back is very 2007.

I am convinced much of the UK banking crisis following the run on Northern Rock that year would have been avoided if the Bank of England had stepped in to provide liquidity earlier. It was when the plentiful liquidity that supported bank property and corporate lending suddenly dried up as it became clear just how unbalanced that lending was that the global financial crisis was triggered.

Let me ask a rhetorical question: Is it possible China’s well known hot property bubble, it’s corporate borrowing binge, plus the high degree of corruption within the system, is fuelling a very real banking crisis in China? Is China about to suffer its’ very own internalised version of the Global Financial Crisis of 2008? How much worse will it be made by the ongoing Covid bogey being used to keep the economy under control? Are Covid Lockdowns being used to disguise the scale of a massive Chinese financial crisis?

Just asking…


Source : Morning Porridge

Infographic: Earth’s Tectonic Plates

See large image . . . . . .

Source : Visual Capitalist