Long Stories Short.

El Mayo's letter gets everyone's attention.

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1. China's new home prices fell at their fastest pace in nine years in July, as a slew of support policies failed to stabilize prices and restore confidence in the struggling property sector. The prolonged housing market slump has weighed heavily on the world's second-largest economy and its consumers, with analysts saying Beijing's 5% GDP target for 2024 may be too ambitious even as other economic gauges have steadied. (Source: reuters.com)

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2. China’s economic malaise extended into the third quarter, drawing renewed attention to the need for more fiscal stimulus as domestic demand falters under a prolonged housing downturn. A surprise slowdown in fixed-asset investment to 3.6% in the first seven months of the year was among the biggest takeaways from data released on Thursday. Retail sales beat expectations largely on a seasonal uptick, though remained far below pre-pandemic growth. Industrial production softened slightly but continued to outpace consumption. The latest snapshot of China’s $17 trillion economy points to an overall loss of dynamism and signs of deterioration as consumers and businesses turn increasingly pessimistic. Recent government efforts — including interest-rate cuts — to stimulate consumption and investment are barely moving the needle, as the world’s No. 2 economy continues to lean on manufacturing to power growth. (Source: bloomberg.com)

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3. Robin Harding:

Perhaps the true concern of the People’s Bank of China (PBoC), and a well justified concern at that, is the downbeat and potentially self-fulfilling signal sent by falling bond yields. They amount to a vote of no confidence in government policy, a forecast that economic conditions will not improve and a warning that deflation will take root if nothing is done to stop it. The next stage in 1990s Japan, note economists at Morgan Stanley, was for companies to respond to the low-price environment by limiting wage growth. That is how a deflationary spiral can take hold.

The PBoC recognises the fundamental problem, referring in its most recent policy report to “insufficient effective [domestic] demand”. Constrained by its need to stabilise the exchange rate, however, the central bank cannot do much. It made one small rate cut in July. It may be able to do more as and when the US Federal Reserve eases policy, narrowing the interest rate gap with China. The PBoC is also equipping itself with the tools for more active intervention in bond markets, which is perfectly reasonable, but will not hold back the macroeconomic tide that is pushing yields down.

The real need is still for more effective reflationary action by China’s government. Beijing continues to shovel money towards the manufacturing sector, which generates activity in the short term, and keeps GDP growth on track. But adding more and more supply, while doing little to encourage demand, will not bring the economy back into balance any time soon. The priorities should be to clear up the overhang of unsold property; to support local government and household budgets; and to cease heavy-handed state interventions, so private companies have the confidence to invest. But Beijing’s policies in all these areas remain halfhearted, reactive and incremental. (Source: ft.com)

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