Summary

Leland focused on new data received on China’s economy, not yet public knowledge. China is often seen as just one however Leland argues there are multiple China’s, with the differing dynamics between the coast and the periphery, state and private firms, large firms and SMEs. Whilst the Chinese government was reporting 3.2% GDP growth YoY in Q2 2020, and over 2% GDP growth for the full-year, China Beige Book was seeing a far less intense recovery. That said, CBB saw many of the same trends as reflected in official data: the 2020 recovery was primarily a production supply side recovery, primarily amongst the largest firms, and primarily based in the big three regions: Beijing, Shanghai and Guangdong. Examining Q1 2021 data, there is far more optimism, with less uneven growth and momentum across sectors, regions and firm sizes. However, to track whether China is on a consistent and durable recovery in 2021 it will be critical to watch the composition of growth, and not purely year-on-year data (which will mostly be comically large numbers because of the low base of comparison). In terms of consumption, the biggest drag on the economy during 2020 was the retail and services sectors clearly lagging behind the industrial side. In Q1-21 data, the retail sector made big improvements; however, the services sector saw little momentum from Q4 and borrowing rates were also significantly lower and interest rates paid much higher.

Leland moved on to discuss the renewed government deleveraging campaign. From Q1, there is ‘tentative evidence’ of it. SOE borrowing sunk to its lowest level ever in CBB data, while the cost of capital divergence between state and private firms blew out, indicating a concerted government policy push. This signifies deleveraging as the most privileged cohorts in the economy have less access to capital and are paying more to get it. For true deleveraging, this trend will need to continue for several more quarters.

Leland gave his views on a possible commodity supercycle, and noted CBB data tell a very different story from the narrative being sold by Goldman and JPM. Looking at the Q1 data, commodity firms are sending mixed signals, with copper firms reporting substantial weakness Data also show the lowest level of commodity sector borrowing in China Beige Book’s surveying history. This could mean that firms are stable and do not require access to capital, however it is more likely to mean retrenchment and that markets are getting ahead of themselves. There was also a slowdown in the construction sectors, and particularly transport construction, which is a proxy for fiscal spending and intent. Overall, looking through the lens of Chinese data, there is no evidence yet of a commodity supercycle—at least one that originates in China.

In terms of Biden policy, Leland states there is no real desire to engage with China in the short-term, with the focus on Covid recovery, with vaccinations and stimulus. The Biden team also doesn’t have a coherent strategy yet, besides knowing It needs to maintain a carryover tough strategy. In terms of the White House on China policy issues going forward over the foreseeable future, there are a handful of issues that could tilt policy more hawkish or more dovish. On the radar for hawkish policy would be Taiwan and Xinjiang, with US changing rules of engagement with Taiwan and this builds pressure on US officials to engage diplomatically with Taiwan. Leland also discussed what he calls the most important company in the world, Taiwan Semiconductor (TSMC), with Taiwan becoming an increasingly important player from a tech supply chain perspective as well as diplomatically, in turn putting pressure on the Chinese to counter this pressure. The “Xinjiang Issue” refers to the Uighur labour camps in Western China, which is causing major blowback and sanctions from Western countries that have labeled what is happening a genocide.  He said to expect this issue to continue to ramp up in the coming months, especially as Beijing is hosting the 2022 Olympics and Western pressure to boycott has already begun.

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