The easing of Covid-19 restrictions in China cannot mask the assault on individual liberties. Under the cover of the pandemic, the Chinese authorities are exerting greater control over the population through a myriad of apps. The middle-classes are growing weary. Now, after the ‘lying flat’ movement, a new term has emerged: runxue, or “the study of running away.” Human capital flight, or passive resistance, threatens China’s long-term growth prospects.
Industrial metals such as copper (-13.5% YTD) are not responding to China’s infrastructure push in the usual way. There may be a limit to the effectiveness of current policies (fiscal and monetary). The PBoC is urging banks to support struggling developers. Unless there is a significant improvement in home demand, this could further weaken bank profitability. The crisis that has engulfed China, Covid-19 aside, has been driven by overleveraged property developers and overindebted consumers. Focussing on extending credit to beleaguered sectors of the economy propagates the misallocation of credit.
A major slowdown in China could be a boon for stock markets globally: it could support the long end of the sovereign bond curve, pushing down yields.
But the case for a recession in the US this year is also growing: this is likely to be negative for stocks over the summer. The big risk for Treasuries from the BoJ’s MMT experiment has not gone away either. The BoJ’s government bond holdings now exceed 50% of the total debt outstanding. The Japanese central bank faces large unrealised losses. This week will be a big test. The BoJ’s underlying measures of inflation showed further accelerations in the y/y rates for both the median CPI and the trimmed mean CPI in May. The deflationary forces from commodities may not come soon enough to bail out the BoJ: the 40-year JGB yield hit 1.31% this morning. If the yield cap goes, this could trigger another leg lower in stocks globally.
The risks facing private equity have not gone away either: as this story shows, there are real doubts over valuations of some companies in the private market. Another down leg in the high yield corporate bond market, yet to really open after a long hiatus in issuance, would spell trouble for private equity companies.
