Columnist of the Media/Nippo financial opinion (Bkopleader)

China’s economy has entered the bottom of the short cycle, but it should be reduced to expectations for strong recovery; three balance sheets are deteriorating, but the leverage is not yet on the threshold.

壹: The impact of trade in Central America - an opportunity to thrive

Since the beginning of the trade war, China’s stock market began to pay a heavy burden. However, the United States market, as the leader of the trade war, did not really feel that impact — until recently, China’s economic slowdown had become more pronounced and the short cycle of the United States economy had been gradually observed. The question now is whether the impact of the trade war has been eroded by the Chinese equity market, which has experienced more than 30 per cent of the collapse and is classified as one of the worst global markets this year?

In response to the above, we calculated the 40-week turnaround rate for the rolling composite index. We would like to see whether the fall in 2018, as compared with the historically significant city of bears, has reached the bottom. It can be seen that, following the collapse of the stock market in 2018, this return indicator has fallen to the United States economic recession in 2001, as evidenced in 2005 by the fall of 1,000 points and the level during the European sovereign debt crisis in 2011. However, the depth of this collapse is not commensurate with the decline in the global economic crisis of 2008, and the extent to which the Chinese stock market foams were destroyed in 2015 (figure 1). Therefore, unless next year’s trade war deteriorates further, we can say that recent market price changes have largely reflected the impact of trade wars and the slowdown in China’s economic cycle.

Figure 1: The extremely low market returns indicate that stock prices have been accounted for in the short term of trade.

One way to measure the impact of trade is to observe the price of soybeans. This is due to the importance of soybeans in the United States export trade to China, and the influence of the Middle West Agriculture State on the United States general elections. We note that, despite the recent deterioration of the trade war, the price of bulk beans in the United States is no longer innovative (figure 2). This observation shows that current market prices appear to have taken into account the short-term impact of trade warfare. Unless the trade war continues to deteriorate, the evidence index and the American soyal futures are all sides of the market price structure, reflecting the short-term extinction of trade in the market price structure. The resumption of bilateral dialogue is a positive signal.

Figure 2: United States futures prices are no longer innovative.

• Three balance sheets in the Chinese economy

Our economic cycle model shows that, in the coming months, the short cycle of the Chinese economy will gradually enter the bottom line, given the implementation of fiscal stimulus and monetary leniency policies. Our cyclical model also shows that the short economic cycle in the United States is in the forefront and will continue to disrupt overseas markets in the short term. (Please refer to our report 2018/09/03, Hun Sensit: Conflicts in the Central American Cycle)

When the economic cycle is close to the point of embarkation, this means that the negative factors in the economy are already bleak. At this point, we will see that, despite the decline in interest rates, credit expansion has slowed down to a nominal level of economic growth. The growth of economic activity, particularly in China, is gradually stagnating; consumption is weak and stock levels are low. As a rain-fed form of economic activity of the greatest concern, stock markets are also showing low performance. China is at such a critical juncture.

However, an economic cycle often requires the help of government policies if it is to leave the valley. The greater the challenge, the higher the strength of policy support — as is now. The sine qua non for policy effectiveness is that the Government still has room for stimulus, while the private sector balance sheet has not yet been scaled up. In short, there is still room for a shift in the balance sheets of the public and private sectors.

In the following sections, we will study the leveraging of different sectors in the Chinese economy.

Family: China’s real estate bubble

Can China’s real estate be a bubble? There has been no definitive debate on the Chinese real estate foam. Foams, including penters themselves, used a very low rate of return on rent to compare mortgage interest rates, a high proportion of real estate prices compared to income, and empty rates to confirm their perception of real estate foams. Despite these arguments, the prices of real estate have been cut off over the past two decades. While real estate is a long-term asset, it is difficult to choose the time to withdraw, so strong price performance suggests that the prevailing prevailing view may be somewhat biased.

The downward pressure on real estate prices became apparent as the Chinese economy slowed. Experts have debated whether the shift to higher housing prices has led to an increase in the leverage of Chinese households to a high level of unsustainability and has affected the consumption of the population. Ultimately, high leverage will likely lead to the destruction of real estate foams.

In addition to the traditional indicators for measuring affordability and the health status of family balance sheets, we believe that the examination of Chinese families’ debt-servicing capacity across time and region may be more illustrative. If Chinese households are able to afford their monthly rents, it is reasonable to invest in real estate in the form of leverage, provided that the rate of return on home purchases exceeds the mortgage rate. In addition, considering the significant differences in real estate markets in different regions, it should be considered that the real estate market should also vary from location to place.

Figure 3: 35 city-based disposable income growth faster than loan repayment months

At the national level, we find that household disposable income grows faster than home prices. Housing repayments account for 39 per cent of total household income. This percentage has risen to a similar level in 2007 and 2011. Two years later, the year in which China’s economy was relatively difficult (figure 3). At a time when the interest rate in the United States began to rise from the bottom of history, it stood at 21 per cent. This comparison can be understood as the seemingly burdensome liability of the Chinese family. However, compared with 56 per cent in Hong Kong, there is some variation. This ratio in Hong Kong even exceeded 100 per cent during the 1997 period of effective real estate foams. Therefore, differences in Chinese and western culture should be an important factor that leads to a significant difference in the burden of housing (figure 4).