China crisis: Six numbers that highlight rising distress in Asia’s largest economy
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China crisis: Six numbers that highlight rising distress in Asia’s largest economy

Six seemingly random numbers, when threaded together, demonstrate that some kind of negative watershed event may not be too far off in China.

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The first number is 16. This is the number of consecutive months – running from May 2021 to August 2022 inclusive – in which new export orders were below 50, the line dividing expansion and contraction according to PMI surveys.

This is odd given that, as Rhodium Group wrote on August 31, exports have been a “primary driver of growth” since the start of the pandemic. Not for the first time, it pays to distrust the veracity of government data.

Rhodium reckons that China has overstated exports (officially valued at $333 billion in July, when the trade surplus hit a record high of $101.3 billion) by up to 15% this year, offering a trio of countervailing points of proof.

First, as noted, Chinese exporters face declining new orders. Second, the gap between reported exports and FX settlement has risen by more than $400 billion since January 2021, according to State Administration of Foreign Exchange (Safe) data. And third, reported Chinese exports to the US far exceed reported US imports from China. Rhodium blames mainland firms for zealously over-reporting the value of exports to claim tax rebates, which rose 21% year on year in the January to July period to Rmb1.2 trillion ($168 billion), against a 14.6% rise in export value.

It is also worth noting that exports only declined by 5.3% year on year in the second quarter, despite nationwide freight volumes slumping 40% to 50%, due to logistical bottlenecks and Covid lockdowns. Without it, China’s economy would likely have contracted.

With exports rising by just 7.1% year on year in August, and UBS reporting a 15% year-on-year fall in cargo throughput at key ports in the first 10 days of September, expect the state of the economy to worsen into 2023.

Our second number is 7.6. This is the percent share of its listed value shed by Onewo on its first day of trading in Hong Kong on Thursday last week. The IPO had serious blue-chip support: listing sponsors included Citi and Goldman Sachs, and cornerstone investors included Singapore’s Temasek and UBS’s asset management arm.

Its shares priced at HK$49.35 ($6.29) apiece, the mid-point of the marketed range, then slumped on debut. The chief reason? It was likely because Onewo is the property management unit of China Vanke. Yes, the Shenzhen-based developer firm posted an 11% year-on-year rise in net income in the first half, bucking the trend, but investors know the crisis engulfing the real estate sector shows no sign of abating. In July and August, property sales and starts fell 26% and 46% on an annualised basis. September is seen as a ‘golden’ month when seasonal cycles see sales soar. Not this year. Property sales in the first 18 days of September declined 42% year on year, against a fall of 19% the previous month, government data show.

UBS analysts tip property sales to rebound “only modestly” from the second quarter of 2023, suggesting there’s plenty of property pain still to come.

That second number is in turn connected to 0.6, the book value of the Hang Seng China Enterprises index as of Friday, its cheapest level ever. Just three constituents of the 50-member index are up on the year, with property and technology leading the race to the bottom.

With China officially on holiday until October 10, and usually being slow to shake its collective head in the wake of the ‘Golden Week’ holiday, expect mainland securities to remain gripped in a slough of despond.

638% is the staggering rise in the default rate this year on commercial acceptances issued by local government financing vehicles

638, another percentage, is the staggering rise in the default rate this year on commercial acceptances – a risky type of financing that accelerated the 2019 collapse of Inner Mongolia-based Baoshang Bank – issued by local government financing vehicles. Monthly defaults on these bills, recorded and published by the Shanghai Paper Exchange, jumped from 562 in January to 4,146 in August, with the largest share found in poorer inland provinces such as Guizhou and Henan. This matters because of the mounting financial pressure on local government funding vehicles (LGFVs), which exist to help officials splash out on infrastructure.

Rhodium warned on September 26 that rising acceptance defaults showed many of these entities are “receiving insufficient financing cashflows to repay their debts”; adding: “It’s likely that this financial stress… will continue to spread to other instruments.”


The upshot: it is only a matter of time before an LGFV defaults on its publicly traded corporate bonds – at which point, expect investors to flee one of China’s few safe asset classes.

Speaking of which, Rmb8.8 billion ($1.24 billion) doesn’t sound like a big number in the context of the Chinese state and how it likes to solve any issue by bunging copious amounts of debt-fuelled capital in its direction. Yet that was the amount paid by five state entities, including LGFVs, on a land parcel in an unnamed southern province, according to reporting from Caixin magazine.

The consortium has no plans for development. It bought the land from a local authority to help the latter fill its short-term coffers, with the aim of returning it in January 2023. It is a sign of the desperation felt by cash-strapped local governments, not to mention the pressure being exerted on LGFVs to act as a borrower of first resort in land auctions.

Andrew Collier, China country analyst at GlobalSource Partners, said in a report published September 20, that land acquisitions by LGFVs rose 70% year on year in the first half of 2022, to Rmb400 billion, accounting for a quarter of all lands sales.

And so, to the final number. Foreign investors sold $78.8 billion more in mainland securities than they bought in the second quarter of the year, according to Safe. It’s $1 billion under the previous record, set only three months earlier. China isn’t the only country spooking investors (hello UK!) but, spooked by stumbling growth, a tanking property sector and president Xi Jinping’s draconian zero-Covid policy, global investors are increasingly giving Asia’s largest economy a wide berth.

Don’t expect that to change any time soon.

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