Chinese shares got a boost on Friday after inflation numbers came out that were surprisingly mild.
With both food and fuel prices moderating, the consumer price index in China eased to a 2.5% year-on-year increase for August, down from 2.7% in July. The producer price index at factories showed an even-sharper decline, at 2.3% for August and down from 4.2% in the previous month.
Markets gave those numbers a one-day cheer, since the figures are seen as fuel for further stimulus from the Chinese government. Beijing is leery of providing too much support for the economy, particularly when it comes to cheap credit.
The Hang Seng Index in Hong Kong leapt 2.7% on Friday, while the CSI 300 index of the largest mainland listings climbed 1.4%. Hong Kong is by some stretch the worst-performing major market in Asia in the last 12 months, down 24.6% in the last year even after today's surge. Stocks in Shenzhen and Shanghai are down a combined 17.6%.
While the modest pace of price increases for August suggests that Beijing may introduce measures to support capital markets, the Chinese economy faces serious and dire undercurrents caused by a housing crisis and Beijing's disruptive zero-Covid stance.
It's discordant to see inflation slowing in China and remaining at such a manageable rate, when most of the rest of the world is struggling to bring it under control. The central People's Bank of China has previously expressed a tolerance for inflation of up to 3.0%.
In terms of food, vegetable prices in particularly decelerated sharply, with inflation there moderating to 6.0% from a 12.9% pace in July. The cost of eggs also stemmed an upward surge, the pace of gain at 1.7% for August compared with 5.9% in July.
Pork prices, a particular point of concern for the Chinese population, appear to be stabilizing. They rose 22.4%, up from the 20.2% advance in July, but a far cry from the surge in July after pork prices declined 6.0% in June.
Today's sharp rally in Hong Kong shares stemmed a procession of losses this summer that has seen the Hang Seng Index correct 15.9% since June 28.
Tech heavy hitters such as videogame developer NetEase (NTES) and HK:9999, up 4.8%, benefitted from the market's burst of optimism. Web-browser operator Baidu (BIDU) and HK:9888, up 3.8%, e-commerce platform JD.com (JD) and HK:9618, up 3.5%, and JD's rival Alibaba (BABA) and HK:9988, up 3.0%, all outdid the overall benchmark.
But there were also big gains among pure consumer plays, with grocery app Meituan (MPNGY) and HK:3609 adding 4.9%, brewery China Resources Beer (CRHKY) and HK:0291 advancing 4.2%, and milk-products specialist Mengniu Dairy HK:2319 gaining 3.8%.
The headiest gains were enjoyed by some of the most-troubled stocks: property developers.
Country Garden HK:2007, currently China's largest developer by sales, led the Hang Seng with a whopping 16.8% advance. Longfor Group HK:0960, up 7.4%, and China Resources Land HK:1109, up 5.0%, were among the top performers on the day.
This is not a healthy sector, by any stretch of the imagination, and many developer shares have devolved into penny stocks.
Country Garden, which specializes in mass-residential projects on a massive scale, remains 61.9% lower on the year. Last week, the company declared that earnings for the first half of the year had cratered 96.0%, on sales that declined by 30.9%.
Virtually no profit, on sales that are down by one-third, for the company that's currently the country's most-successful developer. Country Garden said that weakening expectations, sluggish demand and a fall in property prices have caused the Chinese property market to slide rapidly into "severe depression," one in which "only the fittest can survive."
We are beginning to see which companies will fall by the wayside. China Evergrande Group (EGRNY) and HK:3333 was the canary in this particular coalmine. Formerly the biggest developer in China, it is also its most overleveraged, relying on fast sales of apartments it has yet to build in order to move on to selling and then building the next massive development.
Evergrande, saddled with more than US$300 billion in debt and now in default, faces a petition to wind up the company. Top Shine Global, a little-known investor in its online homes-and-cars marketplace Fangchebao, has filed to wind Evergrande up. Top Shine alleges that Evergrande has failed to live up to a US$110 million deal to repurchase the Fangchebao shares at a 15% premium if the subsidiary did not proceed with an initial public offering.
Evergrande has succeeded in getting the winding-up petition pushed back, with a hearing adjourned until November 7. The company says that in any case the move would disrupt its efforts to renegotiate its debt with a host of other creditors.
But it may be the start of many such suits, as investors despair of ever getting their money back other than through the courts. Lenders have reportedly appointed a receiver to seize Evergrande's local headquarters in Hong Kong.
The company has been trying to sell the 26-floor China Evergrande Centre in Wan Chai. But a US$1.7 billion deal to sell the building to another developer fell through last October when the buyer, state-owned Yuexiu Property HK:0123, grew concerned that the transaction would not proceed properly given the seller's legal woes.
The long-standing troubles in the property sector threaten systemic risk to China's financial system. Meantime, I explained in my last column how China, with its bid to eradicate Covid-19, is approaching "peak lockdown" with 49 cities and 291.7 million people, or 20.7% of the population, in some form of restricted movement.
The Chinese leadership precipitated the housing crisis by forcing developers to deleverage. The zero-Covid policy is entirely of its own making, with China refusing to import vaccines made outside the country, and cracking down on minor outbreaks in a way that leaves the population with little in the way of natural immunity. What's more, the differential between Chinese interest rates and those in the United States is putting weakening pressure on the Chinese yuan, now approaching the C¥7.0 barrier against the U.S. dollar.
Today's mild inflation is therefore welcome. How Beijing tackles the other, far more serious problems it now faces will be vital to watch.