The general suspicion right now is that Country Garden Holdings (HKG: 2007) and the closely related Country Garden Services (HKG: 6098) are in the final tailspin into a crash landing. The main company, Country Garden, is down 30% over the last week. Of course, it’s also possible to think that the crash has already happened – down 91% over 5 years. Now that Evergrande is already explaining to its bankers CGH is both the largest China property developer still standing and also the largest developer overall. Bonds are trading at perhaps 20 cents on the dollar, a couple of coupon payments have been missed – tho’ not yet in default, another month for that – and, well, can there even be a recovery from this point?
That rather depends upon what the Chinese government does about the property market as a whole. There’s been some throat clearing as if they might do something to support it. But even if they try will that actually work?
Possibly bear China property then
So, China property companies perhaps not on the bull list then. But we should go very much further than that in our analysis. Because if China doesn’t support the property market then it’s going to have to come up with an entirely new economic policy. And that could hit western companies very hard indeed. Tesla (NASDAQ: TSLA) in that first line, but Stellantis, GM, VW and Ford in the second. This requires a little bit of background explanation.
The Chinese economy has been depending upon the property market for growth for a couple of decades now. As China doesn’t have either a proper pension system, nor a state paid health care one (it does, but minimal) then the Chinese people have been saving for their old age. The one child policy also killed off the idea of the age-old pension system, their children. The financial system is deliberately repressed – interest rates on deposits have long been below inflation and stocks, internally, are gambling not investment. So, there’s been massive saving – up to 45% of GDP (a western country might think 6% was high). And a lot of that has been going into property, perhaps 35% of GDP.
So, if the property market collapses – to the extent this hasn’t already happened, so perhaps if they admit it – then there must be a large, massive even, change in Chinese government economic policy.
The usual assumption at present is that Country Garden is going to go down. That’s not certain – because China might try one last reflation. But in the absence of that, probably, yes.
But if that happens, a Chinese export drive?
But what would that new policy then be? There would have to be a shift toward consumer consumption rather than investment as the driver of the economy. In effect, China would become more normal. Consumption would be perhaps 70% of GDP, investment (including depreciation) 20% and the energy sector and mining 10. Rough numbers for a western nation.
But the getting from here to there would be very rough indeed. And really the only way they could do it would be to try to have a massive export boom. Yes, we know, China already makes everything, doesn’t it? But it doesn’t. It doesn’t make the high value stuff at all. Further, it hardly exports cars. And that’s where the most likely attempt at an export boom would be.
And yes, a China export drive probably would be EVs
We’ve actually got the head of BYD suggesting this: “China’s biggest electric carmaker has waged war on Western rivals by calling on the country’s auto manufacturers to unite and “demolish” their competition. “He doesn’t mean just domestically either: “…he claimed “it’s an emotional need for the 1.4 billion Chinese people to see a Chinese brand becoming global”, according to Reuters. “
The threat of this is high enough that the Economist is predicting trade barriers to stop China’s EV companies conquering Europe. It also wouldn’t be Chinese brands made in Europe but made in China and shipped. The US is already talking of imposing such barriers.
EVs because the technology is already open to change
It’s entirely possible to pooh pooh this. Come on, really, no one’s going to buy a Geely when a VW is available, are they? But that’s to misunderstand how technological change makes competition possible. If we’re all going to move from ICEs to EVs then that’s exactly when a new competitor has the chance to enter the market.
Which does leave us with a very strange idea. We can look at China property and go bear on that if we like. But one of the likely implications of that market going all entirely wrong is that the Chinese EV companies will try to conquer Europe – which is bear for the domestic car manufacturers. No, the linkage is not that remote, it really could happen.
