### Summary
The risk of a "real Lehman moment" is increasing in China due to a shadow banking crisis and declining property sales, according to Jefferies' global strategist Chris Wood.
### Facts
- 💣 Chinese asset manager Zhongzhi Enterprise's failure to make interest payments on wealth management products indicates a liquidity crisis and highlights the real estate sector's crisis.
- 💰 Chinese equities are a value trap, says Wood.
- 🏢 Evergrande's problems were not a "Lehman moment" because they were induced by the authorities through the "Three Red Lines" policy.
- 🚫 President Xi Jinping's anti-corruption campaigns and last year's lockdowns have dampened entrepreneurial spirits and damaged China's command economy model.
- 📉 The residential property market's biggest downturn since privatization in the mid-1990s was undermined by lockdowns, even after the relaxation of the "Three Red Lines" policy.
- 💼 For those who believe China is in a "balance sheet recession," owning a dividend index and long government bonds is a recommended strategy.
The People's Bank of China Governor's recent actions have left investors questioning if Chinese authorities are toying with global markets.
China's economic slowdown, coupled with a property market bust and local government debt crisis, is posing challenges to President Xi Jinping's goals of achieving economic growth and curbing inequality, potentially affecting the Communist Party's legitimacy and Xi's grip on power.
Global investors are skeptical of China's ability to stabilize its financial markets, with many predicting that economic pressures will cause the offshore exchange rate of the yuan to reach record lows.
Investors are becoming increasingly concerned about the state of China's economy as informal gauges, such as PMI surveys and soft surveys, indicate a deep-seated confidence problem and a potential miss of the country's 5% growth target this year, leading to a retreat from global assets exposed to the slowdown.
China's economic slowdown is causing alarm worldwide, with countries experiencing a slump in trade, falling commodity prices, and a decrease in Chinese demand for goods and services, while global investors are pulling billions of dollars from China's stock markets and cutting their targets for Chinese equities.
China's economy is facing challenges, with youth unemployment at a record high, mismatched skills in the job market, and the risk of falling into the middle-income trap, jeopardizing President Xi Jinping's goal of turning China into a high-income nation.
China's economy is experiencing a structural slowdown and becoming increasingly opaque, making it difficult for outsiders to understand the true state of the country's economic affairs, as President Xi Jinping prioritizes ideology over economic growth and transparency.
China has defended its business practices and claimed that most U.S. firms want to stay and that Beijing is working to ease market access for foreign companies, in response to concerns from American businesses and global investors about the difficulties and risks of doing business in China.
US companies are becoming increasingly hesitant to invest in China due to concerns over new anti-spying laws, competition from state-funded firms, and the country's economic challenges such as deflation and a property crisis.
China's President Xi Jinping has announced that China will open up its service industries to further promote cross-border trade and investment, focusing on sectors such as telecommunications, tourism, law, and vocational examinations, and aligning domestic standards with international norms.
China's failure to restructure its economy according to President Xi Jinping's bold reform plans has raised concerns about the country's future, with the possibility of a financial or economic crisis looming and a slow drift towards stagnation being the most likely outcome. The three potential paths for China include a swift, painful crisis; a gradual winding down of excesses at the expense of growth; or a switch to a consumer-led model with structural reforms that bring short-term pain but lead to a faster and stronger emergence.
The absence of President Xi Jinping from the G20 summit and the expansion of the Brics bloc highlight the declining interest of non-Western powers in Western-led institutions, signaling a shift towards alternative economic and financial arrangements.
China's economic slowdown is posing a significant challenge to President Xi Jinping's agenda, forcing him to make difficult choices and potentially relinquish some control over the economy. The slump in housing sales and the crackdown on private capital are among the factors contributing to the economic setbacks, prompting calls for change and a reevaluation of economic policies under Xi's highly centralized leadership. However, Xi seems reluctant to make major changes to his strategy, opting for a hands-off approach and avoiding a big rescue plan for distressed developers and local governments. The central government's control over taxes and the need to revamp the fiscal system further complicate the situation. Restoring government finances while reassuring private investors is a daunting task that requires strong leadership and potentially contentious policy changes. The upcoming Communist Party meetings will shed light on how Xi plans to restore confidence in his economic agenda, but some economists and former officials warn that time may be running out for China to embrace necessary reforms.
China's President Xi Jinping is shifting away from the aggressive "wolf warrior" diplomacy and positioning China as a global peacemaker, seeking alliances with the West and Asia, possibly due to economic challenges and a desire to establish more partnerships internationally.
China's appeal to multinational corporations remains strong due to its robust domestic market and commitment to opening up its economy, leading to a shift in the quality of foreign investment inflow into the country, particularly in sectors such as trade in services and high-end manufacturing.
China's economic challenges, including debt, unfavorable demographics, and a stagnating growth rate, have implications for global trade and the ambitions of President Xi Jinping, potentially leading to unforeseen consequences and strategic shifts.
Despite the risks and challenges of doing business in China, many Western companies still see it as a long-term bet due to its economic potential, but they are increasingly cautious and aware of the hazards they face.
China's real estate market downturn, characterized by falling property prices and potential defaults by developers, poses significant risks to Chinese banks, global markets, and Asian economies closely linked to China through trade and investment. The situation has prompted cautiousness among international investors and led to negative impacts on Japan's exports.
China's economy has consistently outperformed other major economies in the past four years, but the US is spreading false narratives and propaganda to hide this reality, according to John Ross, former director of economic and business policy for the mayor of London. The US has two motives: discouraging foreign investment in China and influencing China's political and economic policies.
U.S. and European firms are redirecting their investment away from China to other developing markets, primarily India, due to concerns over China's business environment, economic recovery, and politics, according to a report from Rhodium Group, although China's share of global growth continues to increase.
China's economy is facing potential decline due to high debt levels, government interference, and an aging population, with warnings of a full-blown financial crisis echoing the 2008 US recession. Failure to liberalize the economy could have long-term consequences, as foreign investments are restricted and the lack of capital inflow and outflow could harm businesses.
The Biden administration plans to increase scrutiny of foreign-owned companies' investment plans in the United States, with a focus on national security concerns and potential risks related to China.
China's struggling economy, including its deflation and property crisis, will have a significant impact on the US due to its high foreign investment exposure in China and the dependence of key exporting countries like Chile, Australia, and Peru on the Chinese market.
A retreat of funds from Chinese stocks and bonds is diminishing China's global market influence and accelerating its decoupling from the rest of the world, due to economic concerns, tensions with the West, and a property market crisis.
Despite efforts to attract foreign capital, foreign direct investment in China has dropped by over 5% in the first eight months of the year due to the slow recovery of the global economy and geopolitical tensions, with increasing investment flowing towards Southeast Asia instead.
Chinese President Xi Jinping faces numerous challenges, including economic troubles, natural disasters, community dissent, and international conflicts, as he continues to centralize power, leading to signs of dissatisfaction and potential issues ahead.
The disappearance of China's defense minister and a series of recent upheavals in the country's top ranks are creating uncertainty about President Xi Jinping's leadership, which could impact other countries' confidence in China's economy and political stability.
American firms in China have become less optimistic about the country's future, with a survey revealing that only 52% of respondents are positive about the five-year outlook, the lowest since the survey began in 1999, and 40% of US firms are shifting their supply chains and investments away from China due to geopolitical tensions and regulatory uncertainties.
China's central bank has reassured multinational companies such as Tesla and HSBC that it will optimize its policy support after a sell-off in the stock market and concerns over foreign investment, as firms continue to divert investment away from China due to national security regulation and decoupling risks with the US.
U.S. companies are losing confidence in China and some are limiting their investments due to tensions between the two countries and China's economic slowdown.
China's President Xi Jinping faces criticism as China shifts away from its previous economic success and becomes a "pariah state," with some scholars suggesting he is dealing with structural problems inherited from previous leaders that now threaten the Chinese Communist Party.
Chinese President Xi Jinping's visit to Yiwu, a major manufacturing hub, is seen as a symbolic gesture to boost economic confidence and promote development, as China's economy slows down and Beijing aims to support the private sector.
Chinese investors are rushing to sell their overseas properties, particularly in Southeast Asia, due to worsening financial conditions and the need for cash to solve domestic issues such as business failures and mortgage loan defaults. Uncertain economic conditions, low confidence in production and consumption, and tightening regulations on property developers in China have contributed to the struggle to offload these investments.
China should focus on structural reforms instead of relying on macroeconomic policies to revive its growth, as it has limited room for further monetary policy easing, according to a central bank adviser. The adviser suggests encouraging entrepreneurs and implementing demand-side and supply-side reforms to aid the economy. Recognizing the status of private businesses is also essential for revitalizing investor confidence.
President Xi Jinping's efforts to tackle the housing crisis in China face obstacles as multiple property developers, including Evergrande and China Oceanwide, deal with debt restructuring, liquidation, and potential defaults, leading to investor confusion about the government's plan to stabilize the market.
China's efforts to reopen its economy and attract foreign investment after lifting its COVID-19 restrictions have been disappointing, with cross-border investment flows weakening, communication between the government and foreign investors strained, and business sentiment continuing to deteriorate.
Tensions between the West and China are rising, impacting global markets by increasing inflation and interest rates, shifting supply chains, creating opportunities for emerging nations and tech giants, and affecting industries such as manufacturing, infrastructure, luxury goods, and technology. Investors are split on how to approach the Chinese market amidst these tensions.
China's consul general in New York, Huang Ping, refutes claims of the country's economic decline, presenting statistics and arguing that China remains resilient and open to foreign investors despite concerns over trade flows and government policies.
Investors tend to overlook the gradual impact of the decoupling between China and the world's two largest economies while focusing on the risk of a potential invasion of Taiwan.
Chinese President Xi Jinping should address the underlying causes of the country's economic troubles instead of focusing on the symptoms.
Chinese President Xi Jinping warned against decoupling from China and criticized Western efforts to reduce dependence on the Chinese economy during the Belt and Road Initiative forum, while also emphasizing the success of the infrastructure plan and promoting cooperation in green infrastructure, energy, transportation, and artificial intelligence.
China's central bank governor, Pan Gongsheng, has stated that China will focus on expanding domestic demand and reducing financial risks in order to promote a sustained economic recovery, while also implementing macro policy adjustments and boosting investor confidence.
Growing tensions in the U.S.-China relationship, as well as concerns over employee availability and fair treatment, are causing U.S. businesses to cut back on their China exposure and shift investments to other countries, with Mexico surpassing China as the top destination for foreign direct investment by U.S. firms.
American and European businesses are becoming increasingly pessimistic about doing business in China due to a negative change in sentiment and a deteriorating business environment, including Beijing's hostile attitude, restrictions on technology exports and investments, espionage laws, and rising Chinese wages.
Foreign investors pulling back from China and wealthy residents moving their money abroad are causing the yuan to face downward pressure, leading to the biggest decline in investment capital outflows in China in seven years and eight months in September.
