China Macro Reporter
1. ‘Graphic Truth: China Since Tiananmen’

<tr><td class="bg-holder"><img width="100%" src="" alt="CHINADebate"></td></tr><tr><td class="nl-post"><p class="caption">GZEROMEDIA</p><p><strong>&lsquo;By cracking down</strong> on the Tiananmen Square protesters 30 years ago, China's leadership bet that the country could successfully marry strict one-party rule with economic liberalization,&rsquo; writes GZero&rsquo;s <strong>Alex Klimit</strong> in <a href="" target="_blank"><strong>&lsquo;Graphic Truth: China Since Tiananmen.&rsquo;</strong></a></p><ul><li><strong>&lsquo;That gamble</strong> appears to have paid off &ndash; in the years since, China has gone from bit player to driving force in the global economy, while lifting hundreds of millions of people out of poverty.&rsquo;</li><li><strong>&lsquo;Here's</strong> a look at China's economy then and now.&rsquo;</li></ul></td></tr>

2. Secretary Pompeo’s two-prong China strategy

<tr><td class="bg-holder"><img width="100%" src="" alt="CHINADebate"></td></tr><tr><td class="nl-post"><p class="caption">The Washington Post</p><p class="excerpt">&lsquo;As secretary of state, Pompeo must balance confronting China with maintaining Beijing&rsquo;s cooperation on issues such as North Korea and Iran.&rsquo;</p><p><strong>&lsquo;Mike Pompeo&rsquo;s first year</strong> as the nation&rsquo;s top diplomat focused largely on North Korea and Iran, but he is now spending more time and attention on dealing with China,&rsquo; writes the NYT&rsquo;s Josh Rogin in <a href="" target="_blank">&lsquo;How Mike Pompeo became Trump&rsquo;s China hawk.&rsquo;</a></p><ul><li><strong>&lsquo;Increasingly,</strong> Pompeo has been speaking out about China&rsquo;s malign activities, while privately asking his staff to produce an overarching analysis of the motivations behind the Chinese Communist Party&rsquo;s conduct and strategies to respond.&rsquo;</li><li><strong>&lsquo;Their challenge</strong> is to take the Trump administration&rsquo;s various actions on China and weave them into a broader strategy that can gain bipartisan support and outlive the current administration.&rsquo;</li><li><strong>&lsquo;&ldquo;We are trying</strong> to create an intellectually persuasive argument about China being the number one challenge to the United States,&rdquo; a senior State Department official told me.&rsquo;</li></ul><p><strong>&lsquo;Pompeo&rsquo;s State Department</strong> has concluded that decades of engagement-focused U.S. policy have failed, and now the United States and its partners must change course and respond to the Chinese government&rsquo;s strategy and behavior.&rsquo;</p><ul><li><strong>&lsquo;&ldquo;We fundamentally erred</strong> by underestimating and misunderstanding China&rsquo;s true intention, which is to create a Chinese Communist Party-dominated world order to replace the world order created by the U.S. and its allies,&rdquo; the official said.&rsquo;</li><li><strong>&ldquo;It&rsquo;s not a clash of civilizations,</strong> it&rsquo;s a clash of political systems.&rdquo;</li><li><strong>&lsquo;&ldquo;In China,</strong> we face a new kind of challenge. It&rsquo;s an authoritarian regime that&rsquo;s integrated economically into the West in ways the Soviet Union never was,&rdquo; he said.&rsquo;</li></ul><p><strong>&lsquo;Critics like to say</strong> Trump&rsquo;s China approach represents a Cold War mentality or a zero-sum game. That misunderstands what the U.S. government is trying to do.&rsquo;</p><ul><li><strong>&lsquo;Pompeo&rsquo;s approach</strong> is to separate the areas of the U.S.-China relationship where confrontation is needed from those where cooperation is mutually beneficial.&rsquo;</li><li><strong>&lsquo;As secretary of state,</strong> Pompeo must balance confronting China with maintaining Beijing&rsquo;s cooperation on issues such as North Korea and Iran.&rsquo;</li></ul><p><strong>&lsquo;There&rsquo;s a sense</strong> that Pompeo&rsquo;s argument is directed internally, as well.</p><ul><li><strong>&lsquo;Some officials,</strong> such as Treasury Secretary Steven Mnuchin, are resisting a more confrontational China policy.&rsquo;</li><li><strong>&lsquo;Trump wants to be tough</strong> on China on trade and economic aggression but shows little interest in China&rsquo;s human rights violations or its coercion of Taiwan, for example.&rsquo;</li></ul><p><strong>&lsquo;State Policy Planning</strong> Director&nbsp;Kiron Skinner compared the State Department&rsquo;s effort to&nbsp;<a href="" target="_blank">George Kennan&rsquo;s Long Telegram</a>, which formed the basis for the Cold War containment approach.&rsquo;</p><ul><li><strong>&lsquo;But she was not saying China</strong> is like the Soviet Union; she was saying the China challenge is more complex and, in a way, more daunting.&rsquo;</li></ul><p><strong>&lsquo;Kennan,</strong> in fact, was&nbsp;<a href="" target="_blank">a realist</a>&nbsp;who believed in accommodating the Soviet Union.</p><ul><li>&lsquo;Pompeo is no Kennan; he&rsquo;s much more hawkish.&rsquo;</li></ul><p><strong>&lsquo;The truth is,</strong> nobody knows where Trump will end up on China on any specific point.&rsquo;</p><ul><li><strong>&lsquo;But Pompeo&rsquo;s twin approach</strong> of confronting China now while planning for longer-term resilience against Beijing&rsquo;s strategy is meant to ensure that the ongoing shift in Washington over China is not dependent on any one administration.&rsquo;</li></ul></td></tr>

3. ‘The Fed Is Trump’s Secret Ally in the Trade War’

<tr><td class="bg-holder"><img width="100%" src=",525&quality=90" alt="CHINADebate"></td></tr><tr><td class="nl-post"><p class="caption">Foreign Policy</p><p class="excerpt">‘By lowering interest rates, the body is cushioning the blow of tariffs and convincing the president that they are working.’</p><p><strong>&lsquo;In his various trade wars,</strong> U.S. President Donald Trump seems to have fewer and fewer allies,&rsquo; writes <strong>Chris Miller</strong> of The Fletcher School of Law and Diplomacy in <a href="" target="_blank">&lsquo;<strong>The Fed Is Trump&rsquo;s Secret Ally in the Trade War.&rsquo;</strong></a></p><ul><li>&lsquo;But Trump has kept one key ally in his trade battles: the U.S. Federal Reserve.&rsquo;</li></ul><p><strong>Mind the gap</strong>&ndash; it&rsquo;s good news for President Trump.</p><ul><li><strong>One end of the gap.</strong>&lsquo;Textbook economics teaches that tariffs make countries poorer by driving up prices, thereby reducing business competitiveness and cutting consumer purchasing power.&rsquo; <ul><li><strong>&lsquo;The president</strong> and his advisors do not take that that idea seriously.</li><li><strong>&lsquo;Trump </strong>is, as he has tweeted, a &ldquo;Tariff Man.&rdquo;&rsquo;</li><li><strong>&lsquo;And many of his aides,</strong> including Peter Navarro and U.S. Trade Representative Robert Lighthizer, are long-time proponents of the idea that tariffs should play a major role in trade policy.&rsquo;</li></ul></li><li><strong>The other end.</strong>&lsquo;Economists at the Fed, however, do read economics textbooks.'<ul><li><strong>&lsquo;And whereas Trump</strong> may think that &ldquo;trade wars are good, and easy to win,&rdquo; as he famously tweeted, the Fed believes the opposite&mdash;that they will drag down economic growth.&rsquo;</li></ul></li><li><strong>&lsquo;This gap</strong> is excellent news for the president.&rsquo;<ul><li><strong>&lsquo;The Fed believes</strong> that it should keep interest rates low to boost growth when the economy is slowing (so long as inflation is under control).&rsquo;</li><li><strong>&lsquo;So it has refrained</strong> from raising rates over the past six months, in part to cushion the blow from the trade war.&rsquo;</li><li><strong>&lsquo;In doing so,</strong> it has helped sustain the economic growth that Trump points to as evidence that his tariffs are working.&rsquo;</li></ul></li></ul><p><strong>&lsquo;The Fed has two mandates,</strong> established by law: to keep inflation and unemployment low.&rsquo;</p><ul><li><strong>&lsquo;A year ago,</strong> on both these metrics, all signs pointed to a need to raise interest rates.&rsquo;<ul><li><strong>&lsquo;The economy</strong> was in a decade-long expansion.&rsquo;</li><li><strong>&lsquo;Unemployment </strong>was touching historic lows.&rsquo;</li><li><strong>&lsquo;And the massive deficit-funded 2017 tax cut</strong> had stimulated the economy at a time when many economic models suggested that policymakers should be reducing stimulus to prevent inflation.&rsquo;</li><li><strong>&lsquo;Indeed, in 2018,</strong> inflation hit the highest level in more than five years.&rsquo;</li><li><strong>&lsquo;Surely,</strong> experts and investors assumed, the Fed would keep increasing interest rates to slow the economy and keep inflation contained.&rsquo;</li></ul></li><li><strong>&lsquo;One year and several tariff hikes later, things</strong> look rather different.&rsquo;<ul><li><strong>&lsquo;It is understandable that</strong> the Fed believed it had to act.&rsquo;</li><li><strong>&lsquo;U.S. businesses </strong>and consumers alike are substantially exposed to trade.&rsquo;</li><li><strong>&lsquo;Consumers </strong>buy many things&mdash;from avocados to iPhones to cars&mdash;that are partially or wholly produced abroad.&rsquo;</li><li><strong>&lsquo;Businesses </strong>produce many goods using inputs from abroad.&rsquo;</li><li><strong>&lsquo;And they also sell abroad,</strong> making profits that help fund consumption in the United States.&rsquo;</li><li><strong>&lsquo;All these activities</strong> are made more difficult by tariffs.&rsquo;</li></ul></li></ul><p><strong>&lsquo;But rate cuts</strong>&mdash;a form of economic stimulus&mdash;can slow the bleeding.&rsquo;</p><ul><li><strong>&lsquo;They also support</strong> the stock market, which is as afraid of Trump&rsquo;s tariffs as the Fed.&rsquo;</li></ul><p><strong>&lsquo;Yet </strong>this dynamic is dangerous.&rsquo;</p><ul><li><strong>&lsquo;The more tariffs</strong> Trump threatens and imposes, the more the Fed cuts rates.&rsquo; &nbsp;</li><li><strong>&lsquo;And that,</strong> in turn, encourages him to threaten yet more duties.&rsquo;</li></ul></td></tr>

4. ‘Should China help secure the Strait of Hormuz?’

<tr><td class="bg-holder"><img width="100%" src="" alt="CHINADebate"></td></tr><tr><td class="nl-post"><p class="caption">New York Times</p><p class="excerpt">‘A regular deployment of People’s Liberation Army Navy (PLAN) frigates to the Strait of Hormuz is easy to argue for from the standpoint of China’s national interest, given its dependence on seaborne oil imports from the Gulf. Yet that’s unlikely to happen for the foreseeable future,’</p><p><strong>Note:</strong> The map above shows the routes that tankers travel out of the Strait of Hormuz.</p><ul><li><strong>China&rsquo;s friend Iran</strong> can prevent interference of tankers headed for China through the Strait of Hormuz.</li><li><strong>But the relatively</strong> narrow Malacca Strait shows why China pays special attention to that chokepoint.</li><li><strong>And, the path</strong> through the South China Sea illustrates one of the reasons why China is bent on securing and maintaining control.</li><li><strong>BTW the above map</strong> from the NYT is animated. It&rsquo;s great. Have a look at the flow of tankers <a href="" target="_blank">here</a>.</li></ul><p><strong>&lsquo;Twenty percent</strong> of the&nbsp;<a href="" target="_blank">global oil supply flows through the Strait of Hormuz</a>.</p><ul><li><strong>&lsquo;After the attack</strong> on six tankers there, President Trump thinks China and the countries that benefit from that trade should protect the Strait.&rsquo;</li></ul><blockquote class="twitter-tweet" data-lang="en"><p lang="en" dir="ltr">....a dangerous journey. We don’t even need to be there in that the U.S. has just become (by far) the largest producer of Energy anywhere in the world! The U.S. request for Iran is very simple - No Nuclear Weapons and No Further Sponsoring of Terror!</p>&mdash; Donald J. Trump (@realDonaldTrump) <a href="">June 24, 2019</a></blockquote><script async src="" charset="utf-8"></script><p><strong>&lsquo;China is the largest importer</strong> through the bottleneck strait in absolute terms.&rsquo;</p><ul><li><strong>&lsquo;But its dependence on</strong> oil imports through the Gulf is nothing like the 91% Trump claimed.&rsquo;</li><li><strong>&lsquo;China&rsquo;s overall</strong> dependence on Gulf oil is closer to&nbsp; <a href="" target="_blank"><span class="u-red">44%</span></a>,&rsquo; writes Euan Graham in <a href="" target="_blank">&lsquo;<u>Should</u> China help secure the Strait of Hormuz?&rsquo;</a></li></ul><p><strong>&lsquo;A regular deployment</strong> of People&rsquo;s Liberation Army Navy (PLAN) frigates to the Strait of Hormuz is easy to argue for from the standpoint of China&rsquo;s national interest, given its dependence on seaborne oil imports from the Gulf.&rsquo;&nbsp;</p><ul><li><strong>&lsquo;Yet that&rsquo;s unlikely </strong>to happen for the foreseeable future, for three reasons.&rsquo;</li></ul><p><strong>&lsquo;First,</strong> China is likely to perceive any threat to its own shipping as a red herring in a strategic spat between Iran and the US, and by extension US allies.&rsquo;</p><ul><li><strong>&lsquo;Beijing will focus</strong> instead on maintaining close political relations with Tehran, seeking private assurances that Chinese tankers will not be targeted.&rsquo;</li><li><strong>&lsquo;It has no desire</strong> to be drawn directly into a Gulf maritime security role that bears the additional risks of being pulled into proxy conflicts between Saudi Arabia and Iran. And who could blame it?&rsquo;</li></ul><p><strong>&lsquo;Second,</strong> apart from diplomatic ship visits, there&rsquo;s little evidence to suggest that the PLAN has much operational interest in the Gulf.&rsquo;</p><ul><li><strong>&lsquo;Its focus</strong> has been firmly on the Red Sea.&rsquo;</li><li><strong>&lsquo;Beijing </strong>will seek to continue free riding off other security providers in the Gulf for as long as possible.&rsquo;</li></ul><p><strong>&lsquo;Third,</strong> China&rsquo;s Gulf oil dependence is not only proportionally much lower than that of Japan, Korea and India.&rsquo;</p><ul><li><strong>&lsquo;China </strong>has also made conscious efforts to reduce its exposure to supply disruptions in the Gulf.&rsquo;</li><li><strong>&lsquo;It has already&nbsp;</strong><a href="" target="_blank"><span class="u-red">surged</span></a> oil imports from Iran, before the expiry of US sanctions waivers.&rsquo;</li><li><strong>&lsquo;More purposefully,</strong> China has built up a strategic oil reserve, which may already&nbsp;<a href="" target="_blank"><span class="u-red">exceed</span></a> 500 million barrels.&rsquo;</li><li><strong>&lsquo;It has further maximised</strong> land-based sources, from Central Asia and Russia, currently China&rsquo;s&nbsp; <a href="" target="_blank"><span class="u-red">primary</span></a> supplier (accounting for around&nbsp; <a href="" target="_blank"><span class="u-red">16%&nbsp;</span></a> of its oil imports).&rsquo;</li></ul><p><strong>&lsquo;Finally,</strong> if push really came to shove, China has the option to invest in coal-to-oil technology, ensuring that the PLA would never go short of fuel even under blockade conditions.&rsquo;</p><p><strong>&lsquo;As that familiar</strong> gurgling sound of the Gulf sucking in naval assets reverberates in Delhi, Seoul, Tokyo and Canberra, my bet is Beijing will be content to sit this one out.&rsquo;</p><ul><li><strong>&lsquo;Ironically,</strong> strategic competitors have the advantage on allies and partners when it comes to free riding.&rsquo;</li></ul><img width="100%" max-width="600px" src="" alt="CHINADebate"></td></tr>

5. ‘Why I’ve Lost Faith in China’s Private Sector’: Shuli Ren, Bloomberg

<tr><td class="bg-holder"><img width="100%" src="" alt="CHINADebate"></td></tr><tr><td class="nl-post"><p class="caption">The Washington Post</p><p class="excerpt">‘Directors of corporations have not felt any inhibition upon their borrowing corporate funds for the purpose of speculation, in stocks or in exchange, for their personal profit.’ J. V. A. MacMurray, 1925</p><p><strong>Call it an axiom</strong> or a clich&eacute;, but one of best ways to understand a country today is understand its history.</p><ul><li><strong>And with China</strong> - where its history is ingrained in its people&rsquo;s thinking - that&rsquo;s especially true.</li></ul><p><strong>One of the best sources</strong> on the American view of China (and of other countries and issues) from the mid-1920s onward is <em>Foreign Affairs</em> magazine.</p><ul><li><em>Foreign Affairs</em> is the flagship publication of the Council on Foreign Relations (founded in 1921), which itself has played on outsized role in U.S. foreign policy.</li></ul><p><strong>So, when I read Shuli Ren</strong> in <a href="" target="_blank"><strong>&lsquo;Why I&rsquo;ve Lost Faith in China&rsquo;s Private Sector&rsquo;</strong></a> in Bloomberg, I immediately thought of an article written 95 years earlier in <em>Foreign Affairs</em>, <a href="" target="_blank"><strong>&lsquo;Problems of Foreign Capital in China,&rsquo;</strong></a> by <a href="" target="_blank">J. V. A. MacMurray</a>, Assistant Secretary of State from November 1924 to May 1925, appointed Minister to China in 1925, and one of the leading&nbsp;<a href="" target="_blank">China</a>&nbsp;experts in the U.S. government.</p><ul><li><strong>Which brings</strong> us to another clich&eacute;: The more things change &ndash; as you will see here -the more they stay the same.</li></ul><table class="intable"><tr><td class="intable-border"><p><span class="h5p">&lsquo;China&rsquo;s private enterprises</span> under President Xi Jinping appear to be holding the short end of the stick,&rsquo; writes <strong>Shuli Ren</strong> in <a href="" target="_blank"><strong>&lsquo;Why I&rsquo;ve Lost Faith in China&rsquo;s Private Sector</strong>.&rsquo;</a></p><ul><li><strong>&lsquo;The government&rsquo;s</strong> earnest deleveraging campaign has hit&nbsp;the sector disproportionately hard, and a never-ending&nbsp;trade war with the U.S. has hurt manufacturing, the core of China&rsquo;s entrepreneurial spirit.&rsquo;&nbsp;</li></ul><p>&lsquo;<strong>That&rsquo;s </strong>only part of the story.&rsquo;</p><ul><li><strong>&lsquo;Private businesses</strong> aren&rsquo;t merely innocent lambs waiting on Beijing&rsquo;s chopping board for slaughter.&rsquo;</li><li><strong>&lsquo;Waves&nbsp;</strong>of corporate scandals this year &ndash; escalating in their unsavory&nbsp;nature&nbsp;&ndash; are scaring investors.&rsquo;&nbsp;</li></ul><p><strong>&lsquo;We&rsquo;ve been smacked </strong>by roaring trains&nbsp;of nonsense this year.&rsquo;</p><ul><li>&lsquo;<strong>In April,</strong> drugmaker Kangmei Pharmaceutical Co. said that it overstated cash holdings by $4.4 billion, due to an accounting &ldquo;error.&rdquo;&rsquo;</li><li><strong>&lsquo;Kangde Xin</strong> Composite Material Group Co. didn&rsquo;t&nbsp;skip a beat,&nbsp;telling us its auditor could find no trace of a 12.2 billion yuan ($1.8 billion) bank deposit.&rsquo; &nbsp;</li></ul><p><strong>&lsquo;&ldquo;Qualitative factors</strong> are playing an increasing when assessing Chinese enterprises,&rdquo; S&amp;P Global Ratings wrote in June.&rsquo;</p><ul><li><strong>&lsquo;Put more&nbsp;bluntly:</strong> Firms may look great&nbsp;on paper, but the cash you see on their balance sheets may not even be there.&rsquo;&nbsp;</li></ul></td></tr></table><table class="intable"><tr><td class="intable-border"><p><span class="h5p">Hitting </span>these same issues - 95 years earlier &ndash; is <a href="" target="_blank"><strong>&lsquo;Problems of Foreign Capital in China,&rsquo;</strong></a> by <a href="" target="_blank">J. V. A. MacMurray</a>, U.S. Minister to China in 1925.</p><ul><li><strong>MacMurray </strong>writes mostly here about the financing of railroads in China &ndash; and that&rsquo;s pretty fascinating in itself and worth a look.</li><li><strong>But, the excerpt below</strong> hit the same issues Shuli does 95 or so years later.</li><li><strong>It&rsquo;s a useful reminder</strong> that foreign played a role &ndash; for good and bad &ndash; in China&rsquo;s development long before Deng&rsquo;s opening to the West.</li></ul><p><strong>MacMurray writes:</strong>&lsquo;The building of railways was a task for which neither the Chinese Government nor the Chinese people were competent by training or tradition.&rsquo;</p><ul><li><strong>&lsquo;They lacked</strong> the necessary technical education and experience, and were not familiar with the kind of co&ouml;peration on a considerable scale which is necessary for public works or corporate undertakings.&rsquo;</li></ul><p><strong>&lsquo;Without undue reflection</strong> upon the Chinese people, it may be recalled that their standards of public or corporate responsibilities as trustees have never been developed, as in the case of Western nations.&rsquo;</p><ul><li><strong>&lsquo;For reasons</strong> peculiar to their social and political fabric, the Chinese have developed standards different from our own - in some respects more punctilious than those of Western peoples, but involving none of that regard for the sacredness of a trust which is so conspicuous in the legal and moral concepts of the Occident.&rsquo;</li><li><strong>&lsquo;To risk a generalization</strong> so broad that it must necessarily be at least partly faulty, one might say that the Chinese are singularly conscientious about the obligations of a debt, but equally unresponsive to the obligations of a trust.&rsquo;</li></ul><p><strong>&lsquo;This has been evident</strong> in such corporate activities as the Chinese have undertaken during the past generation.&rsquo;</p><ul><li><strong>&lsquo;Directors of corporations</strong> have not felt any inhibition upon their borrowing corporate funds for the purpose of speculation, in stocks or in exchange, for their personal profit.&rsquo;</li><li><strong>&lsquo;It has resulted</strong> that Chinese corporations have frequently ended in bankruptcy through some fluctuation in shares with which the corporation itself was in no wise concerned.&rsquo;</li></ul></td></tr></table><p><strong>Editor&rsquo;s Note:</strong> I was once teaching a class at Harvard on real estate capital markets to a group of wealthy and successful Chinese real estate professionals.</p><ul><li><strong>One asked me</strong> why western fund managers take so long to decide whether or not to invest in a Chinese real estate project.</li><li><strong>I replied</strong> that foreign fund managers have a fiduciary duty to those who invest in their funds &ndash; an obligation of trust in the handling of other people&rsquo;s money that means special care and lengthy due diligence before a fund&rsquo;s investment committee can make a decision.</li><li><strong>After giving my explanation,</strong> I looked out at 25 or so students who had expressions ranging from incredulous to blank incomprehension.</li><li><strong>By luck Harvard Business School</strong> had a Case Note on the responsibilities of a fiduciary in Chinese (indicating to me that I wasn&rsquo;t the first to encounter this question).</li><li><strong>Using the Note, </strong>I taught a special class.</li><li><strong>And,</strong> while the group got the concept and the difference between the Western and Chinese ways, I don&rsquo;t think it changed any attitudes about obligations of trust.</li></ul><p><strong>I used to get</strong> the same question from the Chinese side about slow Western investors &ndash; often meaning me - when I was negotiating real estate deals in China.</p><ul><li><strong>I would tell them,</strong> after my explanation of fiduciary responsibilities, that if it were my money, I would invest. But it&rsquo;s not.</li></ul></td></tr>

6. ‘How China Failed to Fail: Can China’s Glass Remain Both Half Full and Half Empty?’

</tr><tr><td class="pdf-container"><iframe src=";embedded=true" style="width:100%; height:500px;border:none;"></iframe></td></tr><tr><td class="nl-post"><p class="caption">IIF | Institute of International Finance</p><p><strong>My friend, Gene Ma</strong>, is Head of China Research at the Institute for International Finance (IIF) and one of top China economic experts.</p><ul><li><strong>He sent me</strong> the summary of the &lsquo;IIF&rsquo;s 2019 China Roundtable, which brings together IIF&rsquo;s global member-ship with thought leaders and policymakers who closely watch China.&rsquo;</li><li><strong>Distribution of IIF analyses</strong> is usually limited to IIF members &ndash; members that include every major financial services firm in the world and institutions such as the World Bank.</li><li><strong>So my thanks to Gene</strong> for allowing me to share this report with you.</li></ul><p><strong>The report, </strong><a href="" target="_blank"><strong>&lsquo;How China Failed to Fail,&rsquo;</strong></a> has 20 one-page summaries + great charts that cover every aspect of China&rsquo;s economy.</p><ul><li><strong>I have included </strong>two of the summaries below &ndash; real estate and debt. But be sure to <a href="" target="_blank">read the entire report</a>.</li></ul><h5>&lsquo;REAL ESTATE: Sweet homes driving growth&rsquo; </h5><p><strong>&lsquo;It is hard to overstate</strong> the importance of China&rsquo;s real estate investment, which affects 40 industrial sectors and was equivalent to 13% of China's GDP in 2018.&rsquo;</p><ul><li><strong>&lsquo;Moreover,</strong> more than 60% of household assets are tied to properties, and land sales account for about half of local government revenues.&rsquo;</li></ul><p><strong>&lsquo;The recovery</strong> of the real estate sector was instrumental in stabilizing growth after 2015.&rsquo;</p><ul><li><strong>&lsquo;Besides </strong>relaxing certain housing policies, the PBoC also provided pledged supplemental loans (PSL) earmarked for shantytown redevelopment projects (SRPs).&rsquo;</li><li><strong>&lsquo;As a result,</strong> fixed asset investments (FAI) in residential housing, which accounted for over 70% of total real estate FAI, picked up from its trough in 2015 to 18% in Jan-Feb this year.&rsquo;</li><li><strong>&lsquo;While FAI</strong> in office buildings improved, the investments in commercial properties such as shopping malls remain depressed (Exhibit 1).&rsquo;</li></ul><img width="100%" max-width="600px" src="" alt="CHINADebate"><p><strong>&lsquo;Since 2015,</strong> China&rsquo;s housing policy has avoided being &ldquo;one-size-fits-all&rdquo; and was customized for different cities.&rsquo;</p><ul><li><strong>&lsquo;The housing subsidies</strong> were mainly aimed at small towns, which suffered from large inventory overhang, while the housing policy in large cities remained relatively tight.&rsquo;</li><li><strong>&lsquo;Thus,</strong> unlike the previous price cycles when large cities witnessed much faster price increases, home prices in small towns outpaced those in large cities since 2018.&rsquo;</li><li><strong>&lsquo;In February,</strong> home prices in-creased by 3.4% in the four largest cities, but by 11%~13% in smaller ones (Exhibit 2).&rsquo;</li></ul><img width="100%" max-width="600px" src="" alt="CHINADebate"><p><strong>&lsquo;This housing cycle</strong> seems to be in its late stage.&rsquo;</p><ul><li><strong>&lsquo;After peaking in 2017,</strong> home sales slowed to 5% in value and -4% in volume in Jan-February (Exhibit 3).&rsquo;</li><li><strong>&lsquo;Land sales</strong> also slowed to 6% in the past half year.&rsquo;</li><li><strong>&lsquo;Moreover,</strong> since the latest round of housing stimulus, households are more leveraged.&rsquo;</li></ul><p><strong>&lsquo;However,</strong> we do not see any imminent danger in the housing market.&rsquo;</p><ul><img width="100%" max-width="600px" src="" alt="CHINADebate"><li><strong>&lsquo;The unsold inventory</strong> dropped from its peak of almost five months of sales in 2015 to only two months at end-2018.&rsquo;</li><li><strong>&lsquo;The inventory</strong> overhang in small cities has been dramatically reduced.&rsquo;</li><li><strong>&lsquo;Additionally,</strong> housing prices have increased at a reasonable level, which reduced the chance of panic buying or selling in the housing market.&rsquo;</li><li><strong>&lsquo;Finally,</strong> certain actions taken by the PBoC such as easing RRR cuts and lowering interest rates should also help the housing market.&rsquo;</li></ul><h5>&lsquo;DEBT: &ldquo;Precautionary Pause&rdquo; in China&rsquo;s Deleveraging&rsquo; </h5><p><strong>&lsquo;China </strong>is one of the world&rsquo;s most indebted countries, with total debt across all sectors (household, government, financial and non-financial corporate) approaching 300% of GDP.&rsquo;</p><ul><li><strong>&lsquo;Following </strong>a breathtaking accumulation of debt between 2008 and 2016, the last two years have witnessed some moderation in the pace of debt buildup in the private non-financial sector (Exhibit 1).&rsquo;</li></ul><img width="100%" max-width="600px" src="" alt="CHINADebate"><p><strong>&lsquo;Against the backdrop</strong> of strong political commitment to de-risking/deleveraging, this long-awaited slowdown has been mainly driven by a sharp contraction in loans provided by the shadow banking sector&mdash; down over 10% since end-2017.&rsquo;</p><ul><li><strong>&lsquo;This sharp</strong> and steep reduction in non-banks&rsquo; bank-like activities has contributed to a modest deleveraging in the non-financial corporate sector.&rsquo;</li><li><strong>&lsquo;At present,</strong> non-financial firms&rsquo; debt hovers at around 150- 155% of GDP, over 5-7 percentage points less than its peak in early 2016&mdash;but this is still one of the highest levels in the world.&rsquo;</li><li><strong>&lsquo;With SOEs</strong> accounting for more than 55% of out-standing non-financial corporate debt, the continued decline in FX-denominated debt (from 9% of GDP in 2014 to 7% of GDP at present) leaves corporates less exposed to swings in the RMB.&rsquo;</li><li><strong>&lsquo;Moreover,</strong> firm level data suggest that Chinese corporates&rsquo; large cash holdings continue to provide an important cushion against downside risks.&rsquo;</li><li><strong>&lsquo;However,</strong> a significant share of Chinese firms still finds it challenging to cover interest expenses on outstanding debt despite some improvement in 2018 (Exhibit 2).&rsquo;</li></ul><img width="100%" max-width="600px" src="" alt="CHINADebate"><p><strong>&lsquo;While the corporate sector</strong> may be cutting back, Chinese households continue to accumulate more debt.&rsquo;</p><ul><li><strong>&lsquo;Indeed,</strong> household debt-to-GDP ratio hit an all-time high of over 52% in early 2019&mdash;well above the EM average (37%).&rsquo;</li><li><strong>&lsquo;While this secular rise</strong> in part reflects increasing importance of China&rsquo;s growing middle class, the striking rise in household debt-to-disposable income ratio from 25% in 2006 to over 117% in 2018 poses a significant risk to the economy.&rsquo;</li><li><strong>&lsquo;Indeed,</strong> the pace of debt accumulation has been much higher than the underlying economic activity, leaving many households more exposed to business cycle swings.&rsquo;</li><li><strong>&lsquo;A sharp rise</strong> in interest rates or an increase in unemployment levels amidst a slowdown in growth could add further pressure on house-hold finances, leading to lower house prices and private consumption, which in turn would disrupt economic growth further.&rsquo;</li></ul><p><strong>&lsquo;Looking ahead,</strong> China&rsquo;s debt trajectory will depend in large part on the evolution of policy priorities while the credit policy continues to ease amid persistent external and internal headwinds.&rsquo;</p><ul><li><strong>&lsquo;While Chinese</strong> authorities&rsquo; pledge to keeping credit expansion in line with nominal GDP growth suggests a pause in deleveraging, the ongoing slowdown in producer price inflation could feed into weaker nominal growth, meaning that already-high debt levels could rise again this year (Exhibit 3).&rsquo;</li></ul><img width="100%" max-width="600px" src="" alt="CHINADebate"></td></tr>