China's Real-Estate Syndrome

Early this year, I started saying that China’s yuan did not likely pose an upset to the dollar as China has been hoping to achieve because China was likely on the path Japan wound up taking back in the early eighties. That was when nearly everyone in the US feared Japan’s economy was going to steamroll over America. Today, months later, major media are writing exactly the same observation:

Anxiety is rising that China is entering an era of much slower economic growth akin to the period of Japan's "lost decades", which saw consumer prices and wages stagnate for a generation, a stark contrast to the rapid inflation seen elsewhere.

China's post-pandemic recovery has slowed after a brisk start in the first quarter as demand at home and abroad weakened and a flurry of policies to support the economy failed to shore up activity.

Today’s news also says the bad news out of China yesterday was so bad that it upset global stock markets. That was the news that China’s exports and imports both experienced double-digit drops in July. That news was so big it turned what could have been a sour US Treasury auction yesterday into a perfect auction. Just as the Treasury deluge I’ve been writing about hit the bond market, which could have driven Treasury yields way up, the turmoil created by the report of China’s economic decline, sent an equally large deluge of safe-haven refugees to America:

That report … was enough to turn investor sentiment sour across the board and trigger flight-to-quality trades to U.S. government debt….

“China has been going through a period of reopening later than the rest of the world and there was hope that the country’s recovery would be faster as a result, but that hasn’t happened,” said economist Derek Tang of Monetary Policy Analytics in Washington, D.C. “Other countries were counting on China’s recovery to drive their own growth because the country has been a big driver of demand for the past decade. But now it may have less momentum.”

This, of course, is also in line with what I have been saying since early in the year about there being no way China is going to help pull the rest of the world out of its global economic malaise as China helped do coming out of the Great Recession. It is now all China can do to save itself from the ruin it brought upon itself with its genetically engineered virus and its drastic Xiro-Covid lockdown policies.

In fact, the report said China, after all its attempted stimulus this year is right back down to where it was during the thick of its government-mandated lockdowns:

China's exports slump to zero-covid level…. China is already facing dual trouble in its manufacturing and real-estate sectors, which have damped the country’s momentum, according to Hadjikyriacos of XM, a Cyprus-based multi-asset brokerage. In a note on Tuesday, the analyst wrote that China’s latest trade data was a “warning sign that both international and domestic demand” are losing power.

The decline in Chinese housing development, pictured above, is playing out in the crash of some of its largest real-estate developers. Evergrande recently went into default, and now Country Garden is joining it:

Country Garden Is in Danger of a Default Rivaling Evergrande

A debt crisis that rivals China Evergrande Group’s default may be brewing in the world’s second-largest economy.

Country Garden Holdings Co., helmed by one of China’s richest women, Yang Huiyan, has left investors in the dark after dollar bondholders said they’ve yet to receive coupon payments effectively due Monday. That puts the firm—which had 1.4 trillion yuan ($199 billion) of total liabilities at the end of last year—on course for its first public default if it doesn’t make the payments within a 30-day grace period.

Formerly the nation’s largest private-sector developer by sales, the builder of more than 3,000 housing projects in smaller cities is a household name and employed about 70,000 people at the end of last year. That status had given it the firepower to withstand an industry cash crunch that led to record defaults since Evergrande first missed bond payments in 2021. But tumbling industry home sales and soaring refinancing costs are threatening that streak.

Chinese families hold even more of their wealth in real-estate than US families, so the decline in housing values is a very big deal for the overall Chinese economy.

“Any default would impact China’s housing market more than Evergrande’s collapse as Country Garden has four times as many projects,” Bloomberg Intelligence analyst Kristy Hung wrote in a report Wednesday. “Any debt crisis at Country Garden will have a far-reaching impact on China’s housing market sentiment and could significantly weaken buyer confidence on solvent private developers.”

Dismantling the BRICS wall

As you read another headline I included today about the BRICS nations moving oil purchases into their promised rival for the dollar that doesn’t even exist yet, bear in mind that the core currency of those nations — the yuan, which they were hoping would be foundational in their new currency — is facing serious troubles. So, is China’s entire economy, and any stimulus measures that lower interest, as China now faces actual deflation, will weaken the yuan further in international currency markets.

So, just remember Japan before you write the US dollar’s epitaph … which is not to say the dollar will not keep declining due to the Fed’s own gross mismanagement and the total fiscal irresponsibility of the US government, but a replacement by the yuan or a currency build off the yuan is not likely.

As we just saw with yesterday’s Treasury auction, however, the US frequently benefits from being the best horse at the glue factory during times of global economic duress. While this week’s first Treasury deluge (one more to follow today and then another on Thursday) benefited yesterday from the huge demand created by China’s terrible news and the flight of capital that caused, US Treasuries are still generally pricing upward, which is causing the trouble for the US stock market I have been warning of:

Rising Bond Yields Emerge as Pressure Point for US Stock Rally

Rising U.S. bond yields are unnerving investors and worsening stocks turbulence as markets confront a pileup of unwelcome news, from last week's downgrade of the U.S. credit rating to revived worries over regional banks.

You see, capital flowed out of global stock markets and into US Treasuries because their rising yields are making attractive investments due to being still considered risk-free, compared to all other markets. That doesn’t mean any flowed into highly overpriced US stocks. In fact, money flowed out of US stocks into Treasuries, too.

This is the stock-bond pump I wrote about a lot when writing on The Great Recession Blog: After Treasury yields rise high enough, the pressure from higher yields pushes down on the pump handle, sucking money out of the pool of stocks, which flows into bonds. The flow of money from the pool of stocks into the bond pool suppresses the rise in yields that had been happening by creating lots of new demand for Treasuries, which lifts the pump handle back up, getting ready for the next rise in yields to push the handle down again. So, there is a see-sawing motion to the rise in Treasury yields (fall in Treasury prices).

Surging yields contributed to last year’s plunge in equities, when the Federal Reserve hiked interest rates to fight soaring inflation…. One worry is that higher yields on Treasuries, seen as basically risk-free because they are backed by the U.S. government, will make stocks less attractive at a time when equity valuations have ballooned.

Yes, they will; so, look out below because stocks have lots of reasons to fall and plenty of room to plunge. That is why we see them falling hard again today, after having tried to rise at the start of the morning to recover from yesterday’s drop.

Data from BofA Global Research showed one-month correlations between the S&P 500 and the 10-year yield stood at their most negative since 2000, meaning the two assets were once again moving sharply in opposite directions. The bank’s analysts called rising yields "an underpriced risk" for the equity market. The S&P 500 fell 2.3% last week, its biggest weekly drop since March….

A series of developments has weighed on the ebullient market mood that had persisted over the last few months. Moody's cut the credit ratings of several small to mid-sized U.S. banks on Monday and said it may downgrade some of the biggest lenders in the United States. That news followed a downgrade from Fitch of the U.S. credit rating last week.

Meanwhile, weak trade data from China undercut hopes for a swift recovery in the world’s second-largest economy

As mortgage rates now rise due to Fitch’s recent downgrade of US credit, and as bank credit ratings get cut by Moody’s, there is plenty more bond and bank and housing and commercial real-estate trouble to come. And likely a lot more credit downgrades, too. The turmoil is just getting started.