Top 5 highlights from my trip to China
Having spent a week in China rubbing shoulders with PM’s, brokers, policy makers and anyone else I could get a meeting with, I found myself surprised by how imminent some risks in China were. In light of this, here are my top 5 things to keep an eye on in the coming months
Economic sentiment: Complacency
The slowdown is bigger than expected but there is a high conviction amongst locals that China will manage to turn around the slowdown, by adding more stimuli. There aren’t a lot of pure optimists amongst the foreigner investors, but people are not outright bearish either (most of them are short term bullish and longer term bearish).
- Housing market: Close to saturation
I visited some up-market real estate development in Nanjing (tier 1 to 2) and I have to admit the places were bustling with potential buyers, mostly young professionals in their early 30s. However, looking at the big picture one should see this market close to saturation: 80% of the middle class owns already a modern apartment (build in the last 10 years) and this group ‘only’ grows with 5% a year.
In my view a managed deceleration of the housing market seems the best possible scenario, with risk of a collapse still looming.
- Peer to Peer lending: A new trend in very dodgy lending
It is still very small (I believe the entire market is about 100 billion RMB) but its growing very fast (100% growth last year). It’s clear the dodgy lenders which have been squeezed out of the other parts of the shadow banking systems are turning to this area. Interest rates of + 20% are not uncommon. It seems quite a bit of this lending is used to speculate in for instance the stock market.
To my surprise, serious, investors like Ping An are lending in this market. Ping An actually saw this as the growth area in their investment portfolio (BoML David Cui has published a report on this last week as well)
- Politics: Risks increasing
We met an official who was introduced with the rank of "minister" in a private meeting. He pointed towards the political tensions between reformists and conservatives at the top. Xi seems still in the process to consolidate power. People seem unimpressed by the actual reform and claim it's more big announcements than action (note that our guy was from the Shanghai fraction which is not necessarily positive towards Xi).
- The stock market: This is going to Blow!
The stock market is completely rigged and everyone knows it (and isn’t too embarrassed to admit it). PM's admitted that it's easy to outperform in China, based on insider information. Specific stocks move before an important government announcement (officials buying). The stock market is seen as the latest tool to increase credit creation: after banks, corporates, shadow banks, property and local governments the central government and the stock market seem to be the last domino stone to get in place.
It's unclear how much contagion we will get in the rest of the economy as this part of the market is relatively small and the government could still step in, but I think people are too complacent about this: This smells walks and talks like a bubble that is about to burst!