Wall Street Keeps Overestimating China's Macro Data

Introduction and Market Overview

In this section, Western Nakamura provides an introduction to the podcast and gives an overview of the market conditions during the Asia Pacific Trading session. He mentions that Asian markets were closed due to a holiday in Japan and inclement weather in Hong Kong.

Market Closure Impact

• Hong Kong and Japan markets were closed today, affecting equity market reactions to data releases.

• Absence of Japanese investors from the market impacts global fixed income and FX activities.

China Data Analysis

Western Nakamura discusses China's recent data releases, including GDP, retail sales, industrial production, fixed asset investment, and youth unemployment.

China Data Highlights

• China's GDP missed expectations.

• Retail sales and industrial production beat expectations.

• Fixed asset investment showed a mixed picture with infrastructure investment up but real estate development down.

• Youth unemployment reached a record high at 21.3% for three consecutive months.

Significance of Youth Unemployment

The focus is on the significance of youth unemployment in China's market dynamics.

Market Relevance of Youth Unemployment

• High youth unemployment rate has long-term implications for economic growth.

• Market-moving policies may be driven by addressing this issue.

• Recent actions by top officials and regulators have positively impacted the Hang Seng Tech sector.

Tech Sector Rally in China

The rally in China's tech sector is discussed along with regulatory actions and government support.

Factors Driving Tech Sector Rally

• Regulatory fines on companies like Ant Financial signaled the end of the tech crackdown.

• Premier Li Keqiang meeting with executives aimed to attract investment and support the platform economy.

• The rally in the tech sector has lifted the broader Hang Seng Index.

Conclusion

Western Nakamura concludes by highlighting the impact of regulatory actions on China's tech sector and the potential for market-moving policies.

Key Takeaways

• Regulatory actions have affected sentiment and value in China's tech sector.

• Market dynamics may be influenced by addressing youth unemployment and supporting innovation.

The transcript provided does not contain any timestamps beyond 5 minutes and 13 seconds.

Youth Unemployment in China

This section discusses the impact of regulatory crackdown on youth unemployment in China.

Impact of Regulatory Crackdown

• The National Employment rate in China was less than 5% before the regulatory crackdown began in 2021.

• Since then, youth unemployment in China has surged to levels above 20%.

• The speaker suggests that this increase in youth unemployment is a result of China's regulatory policies on the tech sector.

• Reversing or lightening up on the regulatory measures could potentially address this issue.

Premier League Pledge and Hang Seng Tech Sector

This section discusses Premier League's support for tech executives and its impact on the Hang Seng Tech sector.

Premier League Pledge and Support

• Premier League pledged support to tech executives, although it is unclear what this support entails.

• As a result, the Hang Seng Tech sector experienced significant growth last week.

• There may have been some spillover effect to US tech companies as well.

Market Relevance of Youth Unemployment Data

This section emphasizes the market relevance of youth unemployment data and its potential impact on services-oriented industries.

Market Relevance of Youth Unemployment Data

• The speaker considers youth unemployment data as one of the most market-relevant macro data points.

• While it may not directly result in a drop below 20%, it could potentially help with services-oriented employment for individuals aged 16 to 24.

• Botched regulatory policies on the tech sector and zero code policies are identified as factors contributing to youth unemployment in China.

Link Between Hang Seng Tech Index and Youth Unemployment

This section discusses the link between the Hang Seng Tech index and youth unemployment in China.

Link Between Hang Seng Tech Index and Youth Unemployment

• China's youth unemployment is directionally aligned with the Hang Seng Tech index through policy decisions.

• Both positive and negative movements in the tech sector can impact youth unemployment.

• Regulatory policies and market conditions play a significant role in shaping this relationship.

PBOC's Market Operations

This section provides an overview of PBOC's market operations for the day.

PBOC's Market Operations

• The PBOC conducted its daily Yuan fixing at 9:15 a.m., resulting in a stronger Yuan than expected.

• A seven-day reverse repo operation injected approximately 33 billion yuan into the market, indicating liquidity injections rather than withdrawals.

• These market operations have implications for market price action.

One-Year MLF Operation

This section focuses on the one-year MLF operation conducted by PBOC.

One-Year MLF Operation

• At 9:30 a.m., the PBOC conducted a one-year MLF operation, rolling over expiring loans and injecting additional liquidity.

• The net result was 3 billion RMB in additional liquidity injections for this month, which is relatively small compared to previous injections.

• The significance of this amount and its implications are unclear, requiring further analysis.

Liquidity Injections and Demand Analysis

This section discusses liquidity injections and analyzes their necessity based on demand.

Liquidity Injections and Demand Analysis

• The speaker questions whether the small amount of liquidity injection (3 billion RMB) is necessary due to a lack of demand or signaling purposes.

• The speaker acknowledges the complexity of understanding the nuances of liquidity tools and their usage in different market, economic, and political contexts.

• Further analysis is needed to determine the true implications of this liquidity injection.

Impact on USD and Yuan

This section explores the potential impact on USD and Yuan based on liquidity operations.

Impact on USD and Yuan

• The speaker suggests that sustained liquidity withdrawals or injections in one-year MLF operations can potentially affect the USD-Yuan exchange rate.

• However, it is unclear whether there is a direct relationship between these factors or if they are coincidental.

• The speaker highlights the need for more information and expertise to fully understand the implications.

Market Price Action and Typhoon Impact

This section discusses market price action and the impact of a typhoon on trading.

Market Price Action and Typhoon Impact

• Due to a typhoon, trading was canceled for the Hang Seng cash index but proceeded as scheduled for China Mainland stocks.

• The direction of Yuan's movement for the day is established during this time.

• The significance of this movement depends on various factors such as market conditions, policies, and economic indicators.

New Section

This section discusses the lack of market reaction to data releases from China and the impact on currency markets.

Market Reaction to Data Releases

• There was no market reaction to the recent data releases from China, indicating a lack of concern or interest in these releases.

• The Australian dollar (AUD), which is considered a liquid DM proxy currency for China activity, showed more impact from the data releases compared to other currencies.

• The AUD had a strong rally last week, so short-term profit taking may have contributed to its reaction to the data releases.

• Copper futures also experienced a sharp decline, potentially influenced by the China data but already on a downward trend.

New Section

This section analyzes the price action in different markets and compares the performance of various currencies.

Price Action Analysis

• The sharpest move during the Asia session occurred at market close, suggesting momentum downside as traders handed off sessions.

• Copper had a significant rally last week but is now giving back those gains rapidly.

• Dollar Yen (USD/JPY) showed strength throughout the trading session while Dalian resumed yen strength and dollar weakness trend towards the end of the session.

• The weakening Yuan played a role in this trend, rather than broad-based dollar restrainting after last week's sell-off.

New Section

This section compares dollar Yen (USD/JPY) and dollar Yuan (USD/CNH) movements and discusses their implications.

Comparison of Dollar Yen and Dollar Yuan

• Dollar Yen and dollar Yuan movements are compared on a same percent scale month to date. The yen is strengthening more against the dollar than the yuan is strengthening against a dollar sell-off.

• Japanese short covering triggered upside for the yen, leading to a directional pivot in the yuan away from its weakening trend.

• The yen's move influenced the yuan's behavior, and it may not have occurred without the yen's impact on USD.

New Section

This section discusses China's GDP print and highlights the challenges faced by Wall Street analysts and economists in predicting China's downside.

China's GDP Print

• China reported a 6.3% GDP growth rate, which may not accurately reflect the actual economic situation due to optimistic characteristics of Chinese official figures.

• The focus is not on quarter-over-quarter figures but rather on understanding why Wall Street analysts struggle to predict China's downside accurately.

New Section

This section discusses the GDP growth comparison in Q2 2022 for China and the impact of COVID-19 lockdowns on the economy.

Impact of COVID-19 Lockdowns on China's GDP Growth

• In Q2 2022, China's GDP growth was at 0.4 percent, which was the second worst reading on record.

• The zero coverage policy and citywide lockdowns during that time severely affected economic activities.

• Shanghai, a major financial and commercial metropolis with a population of 25 million, was also shut down.

• The fact that not a single car was sold in Shanghai during May 2022 highlights the impact of the lockdowns.

• The current year-on-year GDP growth percentage is based on this period of zero coverage lockdowns.

New Section

This section explains why a GDP print of 6.3 percent is not impressive given the context and expectations.

Contextualizing China's GDP Growth

• While a standalone GDP print of 6.3 percent might seem good, it is important to consider base effects and expectations.

• Comparing it to the previous year's zero coverage lockdown period, a higher growth figure would have been expected.

• Even the consensus estimate figure of 7.3 percent would have been considered conservative but achievable.

• However, the official figure came in at 6.3 percent, one full percent below expectations.

• Weakness in retail sales and consumer strength contributed to this overall miss.

New Section

This section discusses why Wall Street consistently fails to accurately predict China's economic performance.

Wall Street's Inaccurate Predictions on China

• Wall Street analysts immediately adjusted their growth estimates for China after the 6.3 percent GDP miss.

• JPMorgan, Citigroup, Morgan Stanley, and other major institutions lowered their China GDP forecasts to five percent.

• The near-unanimous bullish call on the China reopening trade at the beginning of the year was proven wrong.

• Despite overwhelming evidence to the contrary, these analysts maintained their bullish outlook.

• There are two general reasons why Wall Street economists fail to change their view:

• Pure ignorance and arrogance, where they genuinely believe in their own view.

• Personal career risk management, as changing views could be seen as admitting previous mistakes.

New Section

This section explains why high-profile Wall Street economists may not change their outlook on China despite being wrong.

Reasons for Unchanged Outlook on China

• High-profile Wall Street economists covering regions like China may not change their view due to two main reasons.

• The first reason is pure ignorance and arrogance, where they genuinely believe in their initial view.

• The second reason is personal career risk management. Changing views could undermine their credibility and research calls.

• Publishing a comprehensive research report with a strong conviction call creates reputational risks if it is later contradicted.

• These economists cannot simply discard their views when faced with opposing realities.

New Section

This section highlights the challenges faced by Wall Street economists in changing their outlook on China.

Challenges in Changing Outlook on China

• Once a research report with a conviction call is published and widely distributed among institutional investors, it becomes difficult to reverse that view quickly.

• Wall Street economists have personal branding tied to these reports and often appear in financial media promoting them.

• Abandoning or contradicting their previous views would raise questions about their credibility and expertise.

• The fear of career risk management prevents them from easily discarding their initial view, even in the face of overwhelming evidence.

The transcript is already in English, so there is no need to respond in a different language.

New Section

The speaker discusses the importance of not being wrong and how it relates to maintaining views or changing them. They also highlight the reasons behind the late pivot on China's economic outlook by Wall Street banks.

Importance of Not Being Wrong

• The business is not about being correct, but rather about avoiding being incorrect.

• There are two risks: being wrong once by maintaining a view or being wrong twice by changing a view that doesn't play out.

• Changing views can make credibility worthless even if the new view turns out to be correct.

Late Pivot on China Outlook

• The slow consensus pivot towards becoming less bullish on China is due to stupidity, ignorance, and arrogance rather than career risk management.

• Banks like JP Morgan, Citibank, and Morgan Stanley had initially raised their GDP forecasts for China but have now cut them following Q2 GDP release.

• In April, these banks raised their forecasts after Q1 GDP beat expectations.

• This shows a lack of proper judgment and a need to backtrack on their previous overly optimistic outlooks.

New Section

The speaker explains why there has been a slow pivot in outlooks regarding China's economy and addresses the influence of peddling the Chinese Communist Party Line.

Reasons for Slow Pivots

• Stupidity, ignorance, and arrogance contribute to slow pivots in outlooks regarding China's economy.

• Banks like JP Morgan and Morgan Stanley made overly bullish GDP calls based on their own judgment rather than coercion from China.

Influence of CCP Coercion

• While some influence from the Chinese Communist Party may exist in avoiding negativity towards China, it is not as significant as one might think.

• An example is Goldman Sachs downgrading China's bank stocks due to exposure to the property sector. This decision was based on their own analysis and not coercion from China.

New Section

The speaker continues to discuss the influence of CCP coercion on banks' outlooks and provides an example involving Goldman Sachs.

Influence of CCP Coercion (Continued)

• The speaker believes that CCP coercion is not a significant factor in banks maintaining overly inflated GDP projections or bullish outlooks.

• Goldman Sachs recently downgraded China's bank stocks due to their exposure to the property sector, which could lead to non-performing loans and dividend cuts.

• This decision by Goldman Sachs reflects their own analysis and negative outlook rather than external pressure from China.

New Section

This section discusses the reaction to the Goldman analyst report on Chinese banks and highlights the potential implications for Goldman's business in China.

Chinese State Media Backlash

• Chinese State media was the first to react to the Goldman analyst report on Chinese banks. It is unclear why they would be concerned about Goldman's ratings unless there is some validity to the report.

Potential Implications for Goldman

• The fact that Chinese banks themselves started voicing their opposition suggests that there may be some truth to the report.

• The Goldman analyst has not retracted anything from their research downgrade call on these Chinese banks, indicating confidence in their assessment.

• This downgrade comes at a time when Goldman maintains a bullish macro call on China's GDP growth, creating a contradiction in their stance.

• The upcoming July polypier meeting among Wall Street banks and forecasters will provide more clarity on stimulus measures and policy responses in China.

New Section

This section highlights a potential blind spot in Wall Street's analysis of China's economic situation and discusses the lack of transparency surrounding polypier meetings.

Blind Spot in Wall Street Analysis

• Wall Street seems focused on stimulus talk as the main catalyst for China's growth, overlooking other risks they may be creating for themselves.

• The potential path and possibility of no communication or clarity coming out of the July polypier meetings is not being considered by analysts.

• Xi Jinping's reduced transparency and communicativeness regarding polypier meeting readouts raises concerns about whether any meaningful information will be released this time.

Lack of Transparency in Polypier Meetings

• Since October 2022, there have been instances where no readouts or minutes were released from polypier meetings, and when they were, they lacked substance.

• Wall Street analysts are eagerly awaiting clarity on policy direction from the upcoming July polypier meeting, but it is doubtful that any significant information will be provided.

• The lack of communication or a brief statement with no change could leave analysts guessing about China's policy response.

New Section

The speaker discusses the impact of clarity on implied volatility and highlights the importance of understanding China's economic and political structure when investing in Chinese markets.

Understanding Volatility and China's Market Structure

• Not all events that cause volatility are sell signals. Clarity can wipe out implied volatility, such as when a statement is released from the July Paul Bureau meeting.

• China is not a capitalist market-based system like the US, Eurozone, UK, Japan, Australia, etc. It is important to remember this fundamental starting point for most investors, especially foreign institutional investors.

• Investing or analyzing in China requires more of a political analyst role rather than just focusing on markets and economics. The actions and decisions of policy officials override private sector market forces due to the Chinese Communist Party's influence.

• It is crucial to understand that China operates under a different economic and social structure compared to Western capitalist countries. Applying Western financial models may lead to incorrect analysis or investment decisions.

Importance of Political Analysis in China

• Analyzing China economically involves understanding the backroom politics, reaction function, and priorities of its economic leadership. Forecasting macro data becomes more challenging when decisions can be made by a select few powerful individuals at any time out of Beijing.

• Wall Street predictions about what the People's Bank of China (PBOC) will do in Q3 with rate cuts should consider the political dynamics and priorities of China's new economic leadership.

This summary provides an overview of key points discussed regarding volatility events and investing in Chinese markets based on the provided transcript excerpts.