China Economic Forecast: July 3, 2023

Here is my #forecast, dated July 3, 2023.

China and the United States will reach a compromise. China will make large-scale purchases of US Treasury securities, totaling more than $200 billion.

The United States will loosen restrictions on chip sales to China through licenses issued for fixed periods, while tightening controls over critical chip-manufacturing technology.

The endpoint of RMB depreciation is beyond control. Yet the depreciation itself suits the present strategies of both China and the United States, perhaps even the rest of the world. That makes it difficult to say how long the RMB will keep falling, or how far it will go. If I have to make a prediction, it may stabilize when the Federal Reserve stops raising rates. Stabilize, not necessarily stop falling.

The offshore RMB market has already grown beyond anyone's control. For the People's Bank of China to regain control of the exchange rate would be difficult to the point of impossibility, and currency controls will gradually lose their meaning. One possible response would be to use the digital RMB to control the onshore currency and distinguish it from the offshore RMB. Even that would be extremely hard to pull off.

RMB depreciation will produce a short-term export boom. But once inventories of critical materials are used up, in roughly six months, the cost of imported inputs will rise. China will then see broad price increases, falling profits, falling labor costs and lower employment.

Real estate will split into sharply different markets. Growth cities, meaning cities still gaining population, will continue to attract new capital. Their property prices will rise as credit policy loosens. In stable cities, including Beijing and Shanghai, inflows and outflows of people will compete with each other, and employment will decide the direction of property prices. Bubble cities will face collapse. Prices for homes tied to desirable school districts will gradually cave in.

China will not introduce an aggressive stimulus package at this stage. The aim instead will be to capture an export windfall from exchange-rate movements following a China-US reconciliation, though I doubt how effective that will be. Large-scale stimulus may arrive at the end of 2023 or in the first quarter of 2024, depending on circumstances.

The result of all this will be a major loss of wealth accumulated in China over several decades. The Chinese middle class will be the main group from which that wealth is extracted. Most people will not feel it yet because liquidity is still present.

On the timeline, September and December 2023 will be important interim turning points for the Chinese economy. Liquidity, for companies as well as individuals, will be decisive. The exchange rate will be secondary.

A little advice:

a. The aggressive strategy: mortgage every asset you can, borrow RMB and convert it into US dollars. A term of six to twelve months and an interest rate below 8 percent would both be acceptable. Go fully short. Your return will depend on your leverage and the movement of the RMB exchange rate.

b. The moderate strategy: make regular purchases of physical gold, rent out idle property, and preserve ample liquidity instead of holding a large stock of RMB deposits.

c. The idiot strategy, meaning I am telling you not to do this: borrow money to start or expand a real business while holding a large pile of RMB cash.