Consumption is still weak and bond markets still confused

CHINA FINANCIAL - Report 17 May 2021 by Michael Pettis

Special points to highlight in this issue:

* While there is no question that China has an ugly demographic evolution ahead of it, much of the response by analysts and the press to last Tuesday’s census release has been overly apocalyptic. What matters far more than the simple demographic changes is the speed, nature, and extent of China’s adjustment over the next 2-5 years.

* Regulators are forcing the large state-owned banks to provide liquidity support for Huarong through the end of August. This continues the peek-a-boo game in which Beijing pretends that it will not bail out Huarong’s creditors while at the same thing making sure that no creditor takes losses on their Huarong loans. The regulators are in a difficult position in which they want to eliminate the moral hazard that underpins credit markets in China but they cannot tolerate the financial instability that would come if the disappearance of moral hazard assumptions were priced into the market.

* Meituan share prices plunged upon the publication by its CEO of a one-thousand-year-old poem. The market reaction should not be too easily dismissed as just another case of silliness in the Chinese financial markets.

* The economic data release for April still does not indicate that China has begun its rebalancing toward consumption.

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