The Japanification of China takes another big leap forward. And a huge fight with Trump is coming up.
China’s Unexpected Retail Slowdown Shows Urgency to Boost DemandBloomberg reports
China’s retail sales growth unexpectedly weakened in November despite signs of improvement in the housing market, highlighting the urgency for Beijing to further encourage residents to spend.
Retail sales rose 3% from a year ago, the slowest pace in three months and undershooting even the most bearish of forecasts. Industrial output increased 5.4%, keeping momentum as the manufacturing side of the economy continues to outperform consumer spending.
“The data show that the recovery in domestic demand has remained sluggish, while the stabilization in industrial production was likely due to some order front-loading ahead of US tariffs and is not sustainable,” said Michelle Lam, Greater China economist at Societe Generale SA.
The data released by the National Bureau of Statistics on Monday underscores the need for Beijing to reignite consumers’ willingness to spend, especially after the reelection of Donald Trump as US president. The threat of a new trade war may diminish exports’ role as a growth driver after contributing to nearly a quarter of economic expansion this year.
The weakening in retail sales was surprising following strong sales of home appliances and cars a month ago thanks to government subsidies. While sales for those two categories remained strong in November, a number of discretionary goods recorded a slump. Cosmetics led the decline with a 26% plunge in sales from a year ago, while those of clothing, jewelry, beverages and tobacco and alcohol also decreased.
In response to weak data, the benchmark yield fell six basis points to 1.71%, extending a decline from above 2% at the end of November.Lower for LongerYahoo!Finance reports
China’s $11 trillion government bond market has moved into uncharted territory as a new era of monetary policy opens up debate over how much further yields will fall from record lows.
Bond prices soared after the country’s powerful Politburo made its strongest commitment to monetary easing in more than a decade. The yield on China’s 10-year bonds fell to a record low of 1.77%, while longer-tenor yields also tumbled.
Investors are now confronting the risk of what once seemed unthinkable: China’s 10-year bond yields sinking below those of Japan, which currently pay around 1.04%, and potentially sliding even further from there. Yields of zero remain a long way off but talk of that possibility has surfaced, showing how dramatically things have changed in China’s bond market.
“Bond yields at 0% are a possibility,” said George Boubouras, head of research at hedge fund K2 Asset Management Ltd. He said the central bank will need to take an ‘anything goes’ approach to stimulus to avoid the economy sliding into a Japan-style balance sheet recession.
“The Japanification of China bonds may be inevitable at some point,” said Stephen Miller, a four-decade markets veteran and consultant at GSFM, calling the recent stimulus a sugar hit. “China’s issues are deep-seated structural issues. You can’t fully rule out the possibility of yields heading toward zero if these issues aren’t addressed,” he said.
Just four years ago, investors were drawn to Chinese government bonds due to their clear pick up over developed markets. Now, 10-year US Treasuries pay more than double the yield of their Chinese equivalent, after reaching their widest discount in more than two decades.
Debt Write DownsFacing debt deflation, China’s best bet would be to allow more bankruptcies, write down debt, and strengthen the yuan. But it is highly unlikely to do so.US hypocrites led by then Fed Chair Ben Bernanke pleaded with Japan to do that, then failed to do so at our turn in the Great Recession.Counterproductive PolicyLower for longer will suppress the yuan. It’s one way China has of countering Trump’s tariff threats.But it’s also counterproductive.Lower for longer did not help Japan, and negative yields helped neither Japan nor the EU.Unfortunately, the only thing China seems to understand is growth by exports but that means a weaker yuan.Huge Fight With Trump Coming UpEarlier today I asked,
Companies are mounting a campaign to soften the Trump’s trade threats, but Trump’s team says he is serious.
One thing we know is that China is serious. It is acting to weaken the yuan. And Tariffs will weaken the yuan further.A huge fight with Trump is about one month away.More By This Author:Biden and Trump are Both Wrong on US Steel Nippon MergerAn Unfond Farewell to Federal Trade Commission Chair Lina KhanFed Interest Rate Cuts Are Hurting Long-Term Bonds And Mortgage Rates
