To The Moon

Alibaba, China Banks, Insurance Companies , and Funky Subsidies: The Fairytale Lure of China’s Stock Market

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This article is written by Shernice, if you like my article, please hit the like button or do a repost. 

Some investors are totally smitten with China stocks, especially darlings like Alibaba, Chinese insurance companies and the big 4 Chinese banks. They’re all excited, thinking that 3T stimulus measures are like fairy dust, a 5% civil servant pay hike will supercharge spending, and lowering the lending reserve ratio might sound like a magic trick to boost borrowing and kickstart the economy. 

In reality, though? When the economy’s not doing so hot, Chinese people tend to do the opposite! When interest rates dip, they start saving more and spending less. Instead of rushing to borrow, they snuggle up to their bank accounts or bonds, keeping their money safe and sound. Meanwhile, banks get pickier with loans, favoring state-owned companies over individuals. Quite the contrast to what happens in the US!

As a result, banks have a tough time making money! With all that extra savings sitting around, they struggle to lend it out. This means their profits shrink, and their margins drop, leaving them with a big pile of cash they can't really do much with!

You can't flip the "roti prata" theory or "rojak" we use in Singapore to analyze China's economy—it's a whole different recipe over there!

Both the offshore and onshore RMB have taken a tumble, slipping below important levels like a clumsy panda. 

The central bank might let the exchange rate play on a bigger playground soon, giving it more room to bounce around.

Meanwhile, China's 10-year bond yield is playing limbo, hitting a new low of 1.6%. 

It's like the bonds are saying "Eek! We're not so sure about China's economic future!"

The RMB's stumble is making investors feel a bit nervous, like they've lost their bamboo snacks. 

This might lead to some frowny faces when it comes to profit forecasts for Chinese stocks

Investors were absolutely thrilled about the Chinese government offering subsidies for EVs, smartphones and electrical appliances! 

They gushed that it’s like a dream come true for e-commerce giants like Alibaba—definitely a bull market in the making!

These subsidies have pulled future demand forward, encouraging people to make purchases earlier. While this creates a temporary boost in sales, it often leads to a tapering effect in subsequent quarters. Over time, such stimulus measures become increasingly less effective.

China's electric vehicles (EVs) might seem super impressive, but their prices are pushed way too low. Right now, only three brands are really making money: BYD, Li Auto, and Aito.

Everyone else? They’re stuck in a fierce price war! For example, the Model Y in China is selling for just RMB 260,000. Crazy, right?

Chinese government has extended subsidies to new year start of 2025, which is usually a peak season for car deliveries, things are heating up even more. 

And with China’s EV subsidies set to end, the price wars are only getting fiercer and fiercer!

But here’s the twist: investors don’t have dependable China contacts or hedge fund clients who see the real picture. 

Instead, they’re using textbook economics to decode a complex, ever-evolving China. It’s like trying to solve a puzzle with the wrong pieces!

They often say the China market's P/E ratio is like a modest 14, while the U.S. market is strutting at 25. And let’s not forget, the U.S. debt ceiling has already soared past $36 trillion! It’s like China is the hidden gem, undervalued and waiting, while the U.S. seems to be showing off at overvalued heights.

Have they ever wondered, with a touch of curiosity, why money continues to flow out of China to the US even after numerous rounds of stimulus plans and numerous measures aimed at boosting China's property market have failed to revive its economy?

Wasn't China supposed to roll out that local debt resolution plan in November? Right?

So, what now?

If the local governments keep delaying, won’t people just stop spending too?

If the citizens aren’t spending, then who’s supposed to spend?

Oh, I know! The civil servants!

But wait... they don’t have money either!

So, what’s the solution?

The central government gave an order—local governments are to raise civil servants’ salaries.

Yup, they’re giving them a raise—about 5%!

Lots of people were like, "Wow, finally!"

And you know what’s funny? They even back-pay it all the way to July!

But hey, I’ve got two key thoughts here:

First, salaries should’ve been adjusted every two years, right?

So, the fact they waited this long... doesn’t it scream financial troubles?

And second, even if civil servants get their raises, will they really spend more knowing economy is bad?

Now, about local governments.

If they hike salaries, won’t their debt go even higher?

Or worse, will they just "squeeze" more money from local businesses to fill the gap?

So, let’s talk about real estate! From the Evergrande incident all the way till now, it’s been a wild ride.

And remember the “3 big red lines” thing? The mighty measures to kill the real estate market. 

Last year alone, a whopping 780 real estate policies were introduced! 

You’d think with that many policies, they’d be able to help the struggling real estate companies, right?

But guess what? Bankruptcy filings are speeding up!

169 companies went bankrupt recently, and—get this—10 were publicly listed!

Oh, and over the past five years? 1,660 real estate companies have ceased operation.

Now here’s the tricky part:

There’s still very very large unsold inventory, and no one knows what to do with it.

Even Chinese real estate commentators are saying it’ll take years to clear out this mess.

And clearing out those unsold properties? That’s a huge challenge ahead.

But the scariest issues?

Housing loans, the real estate market, consumer spending, and of course, those unsold houses.

And on top of that? Credit loans, mortgages, and corporate loans are in trouble too.

Banks are under pressure, big time!

In the past, if 7 banks in the U.S. went under, it’d make headlines everywhere.

But in China, people think the financial system is totally fine.

Well, spoiler alert—it’s not.

According to China Business Network’s report, 1,999 small and medium-sized banks in China are set to shut down in 2024. 

Almost 2,000 bank failures!

Why? Because of all the rural financial institutions collapsing.

And why’s that happening? Because the crackdown on real estate totally disrupted loans, mortgages, and the rural economy.

Now borrowers can’t pay back their loans, so these banks have no choice but to shut down.

There are lots of hidden bad loans tucked away in the corners of many big Chinese banks and insurance companies, like little secrets they’re trying to keep under wraps!

It’s a big deal, but not many people are paying attention.

And of course, with the economy slowing down, consumer spending is taking a hit too.

It’s a tough cycle!

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