Fourth Time the Charm? Chinese Stimulus Losing Efficacy as Leverage, Home Prices Soar

iFeng: 这些年,我们放过的三次水!
The first round of water discharge began in 08-09. At that time, we happened to encounter the US subprime mortgage crisis. The subprime mortgage crisis triggered the global economic crisis. Of course, it is necessary to release water when the economy is not good. Therefore, since September 2008, interest rate cuts have been lowered. In one round, we cut interest rates five times and lowered the standard three times. The deposit interest rate was lowered by 1.64%, and the statutory deposit reserve ratio was lowered by 1.5%.

The second release of water began in 11-12 years. The US economy is better. The European economy has been affected by debt problems. We are affected again. The economy is not good. It can be understood after releasing water. In that round, we cut interest rates by 2 times and lowered the benchmark deposit rate by 0.5%, and the statutory deposit reserve ratio by 1.5%.

The third release of water began in 14-15 years. This time, the European and American economies are all good, but our own economy is not very good. We have encountered three phases of superposition, including economic growth shift, structural adjustment pain, and pre-digestive period. Stimulating policies, so many pressures have led to a decline in economic growth. The regulatory policy says that “no flooding” is to engage in “sprinkler irrigation”. The result is a five-time rate cut of five times and a 1.5% cut in the benchmark deposit rate. The statutory deposit reserve ratio was lowered by 3%.

This year is 18 years. Since the beginning of the year, the central bank has lowered the target three times. The statutory deposit reserve ratio has been lowered by 1.5%. However, the interest rate has not yet been cut, but the monetary policy has turned to actual easing.
The outlook for the fourth stimulus isn't good.
The economic rebound is getting weaker

However, although each release of water is based on steady growth or growth, the effect of the economic rebound is weaker and weaker, and even ineffective in the long run.

First, from the perspective of quarterly economic growth, during the first round of water release, China's economic growth rate rebounded from 6.4% to 12.2%, and the rebound rate nearly doubled. During the second round of water release, China's economic growth rate was the highest from 7.5%. The rebound to 8.1%, the rebound is about 10%; and during the third round of water release, China's economic growth rate rebounded from 6.7% to 6.9%, and the rebound was almost negligible.

Secondly, the economic rebound after each round of water release is not long. It is only valid for about one year. After one year, the economic growth rate begins to turn down again.

Finally, from the perspective of annual growth rate, the release of water has not changed the long-term downward trend of China's economic growth. During the first round of water release, China's economic growth rate fell from 9.7% in 2008 to 9.5% in 11 years; during the second round of water release, China's economic growth rate fell from 9.5% in 11 years to 7.3% in 14 years; During the three rounds of water release, China's economic growth rate fell from 7.3% in 14 years to 6.9% in 17 years.

Therefore, in one year, the release of water is effective in the short term, but the effect is getting weaker and weaker; when the time is more than one year, the release of water will be ineffective.
The yuan is being inflated at incredible rates.
More and more money

After three rounds of water release, the most direct impact is that China's currency is increasing.

In 2008, China's total M2 was only 47 trillion yuan. By the end of 17 years, China's total M2 had grown to 168 trillion, and the growth rate in 9 years was 257%, with an average annual growth rate of 15.2%.

But if you only look at M2, its main growth is in 2008-11, the cumulative increase of M2 in the first round of water is 80%, and in the second and third rounds of water release, the average increase of M2 is about 40%, looks like The last two releases did not have that much.

In fact, it is not the case, because a large part of the water released later is carried out through the shadow bank, so the currency is more concealed and not reflected in the M2.

The currency represented by M2 is a deposit, which is actually only a part of the liability of commercial banks. If we look at the total debt expansion of commercial banks, the debt scale at the end of 2008 was 64 trillion, and increased to 250 trillion by the end of 17 years. The cumulative increase in 9 years is close to 300%. In the first round of water release, the commercial bank's debt expanded by 80%. During the second and third rounds of water discharge, the debt expanded by an average of 50%, that is, the recent two rounds of currency expansion were not small.
Leverage is rising during each stimulus round.
The debt ratio is getting higher and higher

On the opposite side of the surge in money, the accumulation of debt in the Chinese economy is getting higher and higher.

According to our estimates, the overall debt ratio of the Chinese economy at the end of 2008 was 129%, rising to 166% by the end of 2011, rising to 204% by the end of the 2014 and rising to 241% by the end of 2017. Calculated, the increase in China's debt ratio during the past three rounds of water release was 37%, 38%, and 37%, respectively.

The first round of water discharge was mainly caused by residents and enterprises. After the second round of water release, residents, enterprises and the government were all borrowing money, while the third round of water discharge was mainly caused by residents and the government.

By the end of 2017, the debt of China's corporate sector has reached 153% of GDP, which is at the peak of history and far higher than that of other countries in the world. Under the high debt, the enterprise sector has lost the ability to borrow further, which is reflected in the continuous decline of the financing growth of the corporate sector.

At the end of 2017, the debt of the resident sector has reached 55% of GDP, which is also at the peak of history. Although there is still a gap between the level of 80-100% in developed countries, considering the low proportion of residents in our GDP allocation, it is measured by resident debt/resident income. The debt ratio of the resident sector has exceeded 90%, which is basically the same as that of the United States. In fact, there is not much room for debt. The growth rate of debt growth in the residential sector has continued to decline since this year.

Only the government sector's 34% debt ratio seems to have room for improvement, but this debt rate only includes government bonds and local government bonds. In fact, in the past few years, local governments have adopted shed reform loans, platform loans, city investment bonds, PPP, Financial leasing and other methods have formed a large number of implicit debts. We estimate that this part of the government has a hidden liability of 30 trillion yuan. The government debt ratio after the inclusion of hidden liabilities is close to 70%, which is actually higher than the international warning line!
I think their debt-to-GDP calculation is low, but another 37 percentage point increase in China's debt-to-equity ratio takes it to 278 percent.

A-shares aren't a good investment because they aren't favored by investors or the government. Instead, real estate wins from additional stimulus. The rise in home prices has been incredible, masked by the shift in new home locations in built out cities such as Beijing and Shanghai. If the same homes are compared, Haitong sees prices tripling over these three rounds of stimulus. Which is almost the exact same price rise of the S&P 500 Index off the Satanic low in March 2009.
The stock market has been in a long-term downturn

The debt is getting heavier and heavier, which means that the return of the claim is getting higher and higher. On the contrary, the return of the equity will be lower and lower, which is reflected in the long-term downturn in the Chinese stock market.

Although the release of water can also bring a short-term rebound in the stock market, for example, after the release of water in 2008, the Shanghai Composite Index once rose from 1664 to 3478 points. After the release of water in 14 and 15 years, the Shanghai Composite Index once rose to 5178 points, but the current Shanghai Composite Index is less than 2900 points, compared with the previous round of highs, the decline has been close to half.

If the central bank cuts interest rates for the first time on September 15, 2008, after a decade of water release, the cumulative increase of the Shanghai Composite Index is only 38%, and the annualized growth rate is only 3.3%, which is similar to the bank deposit interest rate in the same period.

House prices are getting higher and higher

On the other hand, real estate has become the biggest beneficiary due to the increasing amount of money.

From the perspective of housing prices, the average price of new home sales announced by the National Bureau of Statistics was only 3,900 yuan / square meter in 2008, and has now risen to 8,700 yuan / square meter, more than doubled in 10 years.

But this price is incomparable, because the new house is farther and farther away. For example, the new houses sold in Shanghai 10 years ago are in the inner ring, and now almost all in the outer ring. According to the comparable price, almost all the first- and second-tier cities have seen their prices rise more than three times, and the annualized increase is more than 15%.
Forex reserves are going bye-bye.
Foreign exchange reserves have turned from rising to falling

At the end of 2008, China’s foreign exchange reserves stood at 1.9 trillion US dollars. In the first round of water release, foreign exchange reserves increased to 3.3 trillion US dollars at the end of 11 years. This round of the renminbi remained strong and rose from 6.8 to 6.3 against the US dollar.

After the second round of water release, foreign exchange reserves remained at 3.3 trillion US dollars at the end of the 14th year. This round of RMB remained stable and rose slightly to 6.2 against the US dollar.

After the third round of water release, foreign exchange reserves fell from 3.3 trillion US dollars at the end of 14 years to 3.1 trillion US dollars at the end of 17 years, while the exchange rate of RMB against the US dollar fell from 6.2 to 6.5, and reached 6.8 in July 18th.

The first two times of China's water release did not lead to foreign exchange reserves and exchange rate pressure. An important background is that the world is in a monetary easing environment. In 2008 and 11 years, the United States and Europe experienced a debt crisis. However, since the beginning of 15 years, the United States has officially transferred to the interest rate hike cycle, so the third Chinese water release began to lead to the loss of foreign reserves and the pressure of exchange rate depreciation.

Coupled with the intensified trade war between China and the United States, the United States, Japan and Europe, the main export partners of China, have a tendency to start a free trade zone. Then China’s exports and foreign trade surplus will be subject to a trend of shrinking, thus giving foreign exchange and the RMB exchange rate. Come to greater pressure.
Haitong concludes with a warning about the cost of stimulus.
Water release is to drink and quench thirst, short-term effective long-term toxic!

Therefore, based on the experience of the past three rounds of water release, we can draw the following conclusions:

The release of money can bring about a short-term rebound in the economy for about one year, but it cannot change the long-term decline in economic growth. At the same time, it will lead to more and more currencies and higher debt ratios. The release of water has led to a short-term bear market in the stock market, which has spawned a long-term real estate bubble, which has intensified the depreciation pressure on the exchange rate.

Some people may say that it seems that it is not so difficult to accept water. Is it not a small rebound in the economy? It’s better than the economy has always been falling back! Moreover, if the debt ratio is high, it can be higher. If the stock market does not rise, everyone will go to buy a house. Isn’t that the past ten years? Habits are just fine!

However, although history is strikingly similar, it is definitely not a simple repetition. If we go back to the water, we will encounter new challenges like never before:

The first challenge comes from foreign reserves and exchange rates. At the beginning, we were releasing water with Europe and the United States. Therefore, our water release only led to the domestic asset bubble. The external situation is still very harmonious, and the foreign reserves and exchange rates are very stable. But now the United States has begun to tighten monetary policy in a trend. If we continue to release water, then it will not only be a problem of domestic asset bubbles, but also pressure on foreign trade and exchange rates.

And for the potential pressure behind the exchange rate, we can make a simple comparison: in 1998, China's broad money M2 was less than half of the United States, while the current M2 is double that of the United States, and the exchange rate of the RMB against the US dollar at that time was 8.3. Now, only 6.8. If there is no support from foreign exchange reserves, our currency has been sent so much more than others. What is the value of the renminbi now worth more than in 1998?

The second challenge comes from the real estate bubble itself. The past three times of water release, each time can not be separated from the start of the real estate market. From the perspective of real estate sales, the national real estate sales area in 2008 was only 620 million square meters, with a contract of 7 million sets, and the national real estate sales area in 17 years was 1.7 billion square meters, equivalent to 19 million sets.

But after ten years have passed, our demographic dividend has long since ended. In 2008, China’s working-age population aged 15-59 increased by 5.18 million, while in 17 years it was a net decrease of 5.48 million. Compared with a decade ago, we have now reduced the net new working-age population by more than 10 million each year, but the new real estate sales are more than 10 million sets.

In the past 20 years, it should be said that China’s 70s and 80s are the main buyers. After 70 years, the total population is 220 million, and the total population after 80 is 222 million. Now 90 has entered the 20-30 age stage. The future of home purchase will become 90 or even after 00, while the total population after 90 is 177 million, only 159 million after 00, after 90 and 00 total is 100 million less than 70 plus 80, which shows that from the population Look, there are not many players in the real estate bubble.

The biggest challenge comes from the heart. We believe that under the model of debt development, we are actually encouraging debt speculation and fighting hard work. Those who work hard can only earn some wages, and the money deposited in the bank is low. Those who work hard to speculate, as long as they dare to find a bank to borrow money to buy a house, due to currency depreciation, they are getting more and more money. If you go on like this, who is willing to work hard, who is not willing to go to debt speculation?

But if everyone wants to take shortcuts, real estate companies are responsible for covering the house for a few months, financial companies are responsible for lending money for a few months, vaccine companies would rather spend money on marketing, not willing to engage in research and development, technology companies are only willing to copy, not Willing to innovate, then our economic aggregate is getting bigger and bigger, but are these production things meaningful in the long run?

In fact, Dario has a very simple analogy for the economic development model of water and debt development. This is like holding a credit card to buy bread. Although it can be eaten in a short period of time, the credit card money is If you want to pay back, you will have a hard time once you pay back the money. Therefore, the development of debt is the overdraft of the future. The greater the intensity of water debts, the greater the pressure on the economy when debts are repaid in the future.

Of course, the development of debt is not entirely wrong. If the project of borrowing investment can create cash flow, it will be able to pay back the money in the future. In fact, there is no big problem. However, if the project of borrowing investment cannot create cash flow, for example, a road or railway with no flow of people or traffic, or a PPP project without benefits, only if the real estate does not have a shed for industrial support, then what should I do if I have to pay back later? Is it a new round of debt?

Past experience guide for the future! I sincerely hope that we can learn from the lessons of flooding in the past, and not to go to the old road of real estate bubble development. We should increase reform and opening up and vigorously reduce taxes to encourage innovation. Otherwise, according to historical experience, we will not be able to live for one year. Face the test of pain!
The risk of a yuan blow-up in this round is very high. Much higher than in 2014-2016. Not only because the stimulus is starting with USDCNY at 6.8 instead of 6.0, but because the risk of a housing market blow-up and much weaker overall stimulus will combine with weaker currency performance amid the final leg of the U.S. dollar "bull" market.

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