Texas Attorney General Ken Paxton has responded to a defiant decision by the Austin City Council (ACC), which voted on Thursday to ignore a state law which prohibits “gender transitioning or gender reassignment procedure or treatment” for minors under the age of 18.

In a 10-1 vote, the ACC passed the resolution which directs city resources away from SB 14.

Paxton Responds

“On May 2, 2024, the Austin City Council passed a resolution that purportedly directs the city manager and city employees not to comply with Texas’s prohibition of puberty blockers, cross-sex hormones, and invasive surgeries for children who believe their gender is different than their biological sex,” Paxton said in response.

“Riddled with problems, the resolution starts with the falsehood that such prohibited treatments have ‘proven to be evidence-based, medically necessary, and lifesaving.’ In addition to a growing body of medical research rejecting such claims, Texas concluded that the proposed treatments for minors are dangerous, and banned the practices by passing SB 14,” he said.

Paxton says his office stands ready to ensure Austin follows state law.

“If the City of Austin refuses to follow the law and protect children, my office will consider every possible response to ensure compliance,” he said. “Texas municipalities do not have the authority to pick and choose which state laws they will or will not abide by. The people of Texas have spoken, and the Austin City Council must listen.”

As the Epoch Times notes further, the resolution was introduced by Council Member Chito Vela, who represents District 4. It was co-sponsored by four other council members—Ryan Alter, Zo Qadri, José Velásquez, and Vanessa Fuentes.

The one no vote was Council Member Mackenzie Kelly of District 6.

“Except to the extent required by law, it is the policy of the City that no City personnel, funds, or resources shall be used to investigate, criminally prosecute, or impose administrative penalties upon: (1) a transgender or nonbinary individual for seeking healthcare, or (2) an individual or organization for providing or assisting with the provision of healthcare to a transgender or nonbinary individual,” the resolution states.

It also directs Austin police to make enforcement of SB 14 their lowest priority.

According to Mr. Paxton, the resolution is nothing more than an “empty political statement” citing that each clause in the resolution directs the city manager to defy SB 14 with the qualifying statement “except to the extent required by law.” He said the ACC would order the city manager and employees to follow the law while pretending to say the opposite.

“The vote by the Austin City Council today to support sex change operations for kids is infuriating but comes at no surprise. Repeatedly, Austin City Council has cared more about virtue signaling than the health and safety of its citizens,” Mary Elizabeth Castle, director of Government Relations for Texas Values, told The Epoch Times via email.

Austin City Council Members | Facebook

Ms. Castle said: “the resolution by its nature does not address the specific enforcement of law and instead directs entities like the local police department and the district attorney, who were not given enforcement power by SB 14, to ignore the law. The resolution is mostly a shell game to make it seem like Austin City Council will not comply with the law.”

In previous years, Ms. Castle said the ACC’s measures with pro-life laws and defunding the police have directed law enforcement to “either ignore complaints regarding laws on social issues they do not agree with or push them to the bottom of the stack.

“Today’s action signals to the larger Austin community that sex change operations for kids are no big deal, when in fact transitioning a child can be deadly and dangerous,” said Ms. Castle.

A new long-term study out of the Netherlands found many adolescents who have doubts about their identity and gender identity grow out of it. The study also found it is normal to have doubts about one’s identity and it is actually relatively common.

In 2023, Mr. Abbott signed SB 14 into law. The law prohibits any physician or health care provider from “transitioning a child’s biological sex as determined by the sex organs, chromosomes, and endogenous profiles of the child or affirming the child ’s perception of the child ’s sex if that perception is inconsistent with the child ’s biological sex.”

The law prohibits doctors from performing numerous procedures on minors as part of gender transitioning including castration, hysterectomy, metoidioplasty, orchiectomy, among others.

Prescription drugs associated with transitioning such as puberty blockers and supraphysiologic doses of testosterone to females or estrogen to males were also prohibited in Texas.

Authored by Ken Silva via Headline USA,

The much-anticipated appeal hearing was held Thursday for Barry Croft and Adam Fox, the alleged “ringleaders” of the 2020 militia conspiracy to kidnap Michigan Gov. Gretchen Whitmer.

This combo of images provided by the Kent County, Mich., Jail shows Barry Croft Jr., left, and Adam Fox. / PHOTO: AP

Croft and Fox were convicted of plotting to kidnap Whitmer after their second trial in late 2022. At their first trial earlier that year, a jury acquitted two other men while failing to reach a verdict for Croft and Fox.

The two men appealed their convictions on multiple grounds. Thursday’s hearing focused largely on the conduct of FBI informants and their handling agents.

Oral arguments in appeal of conviction of Adam Fox and Barry Croft–two men entrapped by FBI in Whitmer fednapping hoax–about to begin.

Basis of appeal in Fox case. Will cover livepic.twitter.com/8DbxqFQ0fw

— Julie Kelly 🇺🇸 (@julie_kelly2) May 2, 2024

Croft’s attorney, Timothy Sweeney, argued that his client should get a retrial because he wasn’t allowed to introduce numerous text messages that showed improper conduct by the FBI.

Those text messages showed how FBI informants were pressuring Fox and Croft to formulate a plan against Whitmer. A list of the texts can be found in this document.

Representing the government, Assistant U.S. Attorney Nils Kessler argued that the FBI text messages were irrelevant because Fox and Croft were already predisposed to committing an act of terrorism.

“All the [FBI] statements identified by defense go to inducement. If jury found they were predisposed [to kidnapping Whitmer], none of that matters,” Kessler said. “This court has held that entrapment can only happen if the government plants an idea in an innocent persons’ head.”

The appeals justices expressed skepticism about Kessler’s argument. One justice disagreed with the prosecutor’s reading of the law.

“They’re saying the jury didn’t see all the pressure, all the government informants pounding on them. Surely that’s relevant?” the justice asked Kessler, to which he responded: “Theoretically, yes, but they don’t identify any statements where an informant actually put that kind of pressure to go kidnap the governor.”

The justices then identified several statements where informants pressured the defendants to move forward with a plot against Whitmer. For example, FBI informant Steve Robeson said in August 2020: “If we don’t talk about actually doing what the fuck we need to be doing, I’m done with meetings.”

Kessler argued that Robeson was only pressuring the defendants to disclose their plan, but the appeals justice seemed to disagree. “I’m reading this as, ‘We need to make a plan,’” she said.

The appeals justices presiding over the case were Judge Joan Larsen, Judge Chad Readler, and Judge Stephanie Davis. Audio, but not video, of the hearing was streamed, making it difficult to identify which justices were speaking.

A recap of the hearing can be found here:

Oral Arguments on Appeal: Adam Fox & Barry Croft, Whitmer “Kidnap Plot” Case https://t.co/CcBkLJFMOb

— Radix Verum (@NotRadix) May 2, 2024

The court reserved its decision for a later date.

Ken Silva is a staff writer at Headline USA. Follow him at twitter.com/jd_cashless.

By Peter Tchir of Academy Securities

On Friday, after the jobs report, we heard a lot of chatter about “Goldilocks.” While we wrote NFP – Great for Markets, we caveated that with – for now. Normally we would agree that there is a “transition” period from “everything is great,” to “everything is bad.” While I’m not saying that everything is bad, I do wonder if we can have more of a “gap” than a transition, largely due to the influence that “American Exceptionalism” has had on people’s perceptions. According to Google Trends, the term peaked on searches this year the week of February 4th and is declining again

Yes, there are some things that have been exceptional. AI has certainly been exceptional on many fronts. The U.S. efforts to help stop Iran’s missile barrage was also exceptional. Away from that, I’m seeing less and less “exceptionalism.” Normally that wouldn’t matter, but I can’t help but wonder if the use of that term has made us interpret data too positively? That we ignore negatives and dwell on positives that support that theory? I’m concerned that we are, which means that we might have less of a transition than a gap, as investors start looking beyond earnings (indicatively, as BofA’s Michael Hartnett just wrote, “US exceptionalism is driven by ‘exceptionally’ easy fiscal policy.”).

Market Exceptionalism

It would be easy to understand if the proverbial “person in the street” thought that big tech was by far the best investment possible. On any given day, American Exceptionalism battles with “You Need to Own Big Tech” for airtime. Heck, the term “Magnificent 7” is still bandied about, though it hasn’t been a particularly useful way of expressing market moves for many months. Yet, since January 31st, other major markets have outperformed the Nasdaq 100, a good benchmark for “big tech.” Some (like China) by significant amounts. I did use the Hang Seng Index rather than Shanghai in the below because Shanghai was closed for a few days so won’t show the full performance until next week, though that performance was picked up by FXI and KWEB – the two ETFs I look at for China.

When, as a strategist, I tell people that I’ve been recommending trading the Nasdaq 100 from the short side (selling rips, as opposed to buying dips, though the behavior is similar), people look at me almost with sympathy. When I add in that I have liked China “for a trade” (I still don’t think it is investible for the longer-term), the sympathy turns to outright pity. Yet the data doesn’t warrant that perception.

What happens if more and more people start focusing on the divergence between the messaging and the actual performance?

While earnings have helped, I’ve seen a couple of things that caught my eye. I did not verify them, but they sounded reasonable:

Sales, in particular, have been mediocre relative to inflation, and the average has been propped up by a minority of large companies that are crushing it.
Earnings, while doing well, are heavily skewed by about 20% of the S&P 500 that is doing extremely well!

Both of these items, which seem reasonable (though I haven’t verified the data myself), would indicate that many companies are living in a world that is far from exceptional. That reality hasn’t hit more broadly, but will it, as we’ve now made it through most of the highest profile earnings reports.

“Exceptional” Economic Data

I could fill this section with so many charts, that it would test my patience with Bloomberg’s charting function. We will only go with two charts (and a separate section on jobs).

The Citi Economic Surprise Index went negative. This index is always interesting because it combines shifting expectations with changes in data. It tends to oscillate because as data comes in strong, many economists increase their expectations for future data, making it more and more difficult for the data to exceed expectations. The opposite also tends to happen. As data underperforms expectations, economists can retain their apparently lofty expectations, hoping that the data will change direction, or (and I believe far more likely) they can reduce their expectations.

Just like for earnings estimates, this process of downgrading the economic outlook could help bonds and make many question growth.

There are all sorts of reasons why we can say that the importance of the Chicago PMI as an indicator has declined (shifts in manufacturing, relative importance of the region versus other regions, etc.). Having said that, this chart caught my eye.

We’ve reached levels only seen during what could be described as “crises.” The good news is that often the bottom of PMI marked a great investment opportunity. That could be the case here, except that we are still near all-time highs, rather than having endured dramatic selloffs (like in previous bottoms). Again, I understand that this particular measure might not be as emblematic of the nation’s prospects as it once was, but this was pretty darn stark!

ISM manufacturing PMI came in below 50 (yeah, I know that we are not a manufacturing-based economy), while it had prices paid spiking and employment shrinking. ISM Services, on Friday morning amidst all the Goldilocks chatter, came in at 49.4 (yes, a service index came in below 50). That index also showed higher prices paid (59.2) with weaker employment (45.9). I’m not sure why that got so little attention, because it doesn’t seem very Goldilocks to me! Okay, the S&P Global U.S. Services Index came in at 51.3, so maybe that offset ISM services, but that isn’t a particularly strong number either.

We could explore revolving credit debt (increasing rather substantially), delinquencies (rising, but still manageable), etc., but we are running out of time and space today.

“Exceptional” Jobs Data

Non-Farm Payroll finally went from exceptional to good. But as I scour the data for confirmation of how strong jobs (as reported by the Establishment Survey) have been, I struggle to find it.

Employment seems weak in many of the surveys, as cited above.

The JOLTS data has shown a steady decline in jobs available. First, I question whether the methodology has truly captured the use of online job searches correctly. How many “stale” or even “fishing expedition” postings are out there (postings where there is no real job opportunity, but if an “exceptional” and I do mean exceptional candidate applies they would make an effort to find a job for that person).

It makes sense (regardless of how accurate the data is) that in an economy that is growing, there is a general pattern of increases in jobs available. That trendline has potentially been broken. We have about 900k more jobs available than we did in November 2018. Yes, actual jobs are more important than jobs available, but I think that we’ve moved back to a “normal” number of jobs available.

But I digress since I care more about the QUIT and HIRE rates from JOLTS. I think they tell us as much or more about the true state of the jobs market than almost any other data we get.

The QUIT rate, an indicator of how comfortable employees are with quitting (presumably because they believe they can find another similar or better job quite easily), has dopped to a level that is lower than in 2018 and 2019 and back to a 2015 to 2016 average.

The HIRE rate is even worse. This indicates hiring on a relative basis, and we are now back to levels seen in 2014.

We are hiring less, there are fewer jobs available, and people are seemingly afraid to quit, so let’s focus on one part. The Establishment Survey, that has a notorious track record of being revised downward by large amounts, has lower and lower initial response rates, and does “its best” to estimate business creation. The Birth/Death model (what a horrible name) provided 363,000 of the (wait, checks notes) 193,000 jobs created in the private sector.

I like my “exceptionalism” to be exceptional, and I also like my data not to be dwarfed by “plugged” numbers. My understanding of the Birth/Death model is that it relies heavily on EIN applications to determine new businesses, which I think has been overstated as anyone from rideshare drivers to people trying to make a buck on social media have applied for EINs to treat themselves as businesses.

I cannot help but wonder if even on the jobs front, which has been close to exceptional, we are exposed to some sort of gap in perception, and we might wind up finding out that Goldilocks met the wrong group of bears and the story doesn’t end so well.

Bottom Line

Lower yields. On Friday, I reiterated our range of 4.4% to 4.6% on 10s. I suggested fading the move at 4.45%. While I still think “deficits” and “supply” will push us higher, I think we have some protection here as the economic data surprises to the downside and as economists ratchet down their forecasts. And simply assuming noise around the true rate of inflation, we could see a pleasant inflation print or two. I think we can own yields here, and will bring back the range to 4.3% to 4.5% on 10s. I’m still in the 2-cut camp, which seems more likely, though I’m leaning towards June/July which seems a bit aggressive.

What do lower yields mean for stocks? That is just such a tricky question as the relationship between yields and stocks has been all over the place. I think that we will see outperformance of small caps, banks, and value here. We’ve seen the S&P 500 moderately outperform the Nasdaq 100 in the past three months and I think that we will see more sectors and industries shift into outperformance mode. We may (probably will) see stocks respond positively to lower yields. But, I am concerned that we won’t see a smooth and gradual transition from “no landing” to “soft landing” to “bumpy landing” and we will jump from “all good” to “all is not-so good” rapidly because we have been ignoring data pointing us to this transition for the past few weeks (or months). So, I remain a better seller of risk here, though won’t fight a rally at the start of the week too much (if one materializes).

Credit. Reduce exposure to the weakest credits and those most tied to the economy. We could see a period where economic conditions warrant a rate cut, but inflation fears keep the Fed on the “higher for longer” mantra. That should hurt some of the weaker credits, but I don’t see a material threat to overall risk, unless we see stocks respond more negatively than they have.

Good luck and May 5th is my favorite day of the year!

X users mocked the California High-Speed Rail Authority’s post on the social media platform, which celebrated building a bridge that goes nowhere. 

“The Fresno River Viaduct in Madera County is one of the first completed high-speed rail structures. At nearly 1,600 feet long, high-speed trains will travel over the riverbed and will run parallel with the BNSF Railroad,” CAHSR wrote on X. 

The Fresno River Viaduct in Madera County is one of the first completed high-speed rail structures. At nearly 1,600 feet long, high-speed trains will travel over the riverbed and will run parallel with the BNSF Railroad. #BuildHSR pic.twitter.com/zWqusPbOB9

— CA High-Speed Rail 🚄💨 (@CaHSRA) May 1, 2024

Billy Markus, the co-founder of Dogecoin, joked, “This is the most remarkable human achievement ever, 1600 feet of high-speed rail after 9 years and 11 billion dollars.” 

this is the most remarkable human achievement ever, 1600 feet of high speed rail after 9 years and 11 billion dollars

it takes about 5 minutes to walk 1600 feet so a high speed rail for that is a really big deal

california is so competent https://t.co/Uff4LT57tZ

— Shibetoshi Nakamoto (@BillyM2k) May 3, 2024

Venture capitalist David Sacks said, “Building products on time and on budget requires a monomaniacal leader who kicks asses to make things run right. Government, which is based on lobbying, backscratching and committee-based decision-making, is uniquely unsuited for this.” 

Building products on time and on budget requires a monomaniacal leader who kicks asses to make things run right. Government, which is based on lobbying, backscratching and committee-based decision-making, is uniquely unsuited for this. https://t.co/y6ymY96nFF

— David Sacks (@DavidSacks) May 4, 2024

“People will be teleporting between planets by the time California achieves high speed rail service from Merced to Bakersfield,” one X user quipped. 

People will be teleporting between planets by the time California achieves high speed rail service from Merced to Bakersfield.

— Jonofarcadia 🦬 (@jonofarcadia) May 2, 2024

Another user said the partially built Los Angeles-to-San Francisco high-speed rail project could accommodate the homeless and migrants. 

It will be home to thousands of homeless

Long before a single train travels it pic.twitter.com/t2m3D9zaxq

— Marc Escens (@Marc_Escens) May 4, 2024

Perhaps California officials should stop gaslighting taxpayers about a decade of work and billions spent – only to come up with a bridge to quite literally nowhere. Big government is inefficient and wasteful. The state controlled by radical progressives is a trainwreck. 

By Teeuwe Mevissen, Senior Macro Strategist at Rabobank

Is the wealth effect being substituted?

Summary

China’s real estate market suffered heavy losses early this year while stock market investors continue to face huge uncertainty.
This will add to the deterioration of household balances and as such could influence private domestic (consumer) demand.
While the wealth effect predicts a deterioration of consumption, the substitution effect would predict the exact opposite.
This paper concludes that the substitution effect is more likely in the case of real estate.
This could be explained by the fact that housing is still expensive despite declining housing prices while at the same time wages are suppressed and youth unemployment is high.
But more explanations (like prepayment risks) could be given for the positive correlation between housing prices and the savings ratio.

Introduction

The new year in China kicked off with turmoil on China’s stock markets. Amongst others, the decision of the court in Hong Kong to liquidate real estate giant Evergrande further undermined investors’ confidence in China’s stock market. A market that already had been battered during the last three years due to ongoing worries about China’s economic prospects, regulatory crackdowns, a changing geopolitical landscape and a real estate sector in crisis. While China’s stock markets have pared some of the most recent losses due to (expectations of) increased government support, investor sentiment will likely remain fragile for some time to come. Moreover, many of the recently imposed government regulations, such as short selling curbs, are likely to be temporary assuming China is really serious about attracting more foreign investments. This follows from the fact that a full functioning market environment includes the possibility to sell stocks short and let market forces determine market outcomes.

Given that stock markets tend to be a leading indicator for the economy’s travails, this special zooms in on the question what the recent market turmoil could mean for China’s economic prospects in the coming year(s). The relation between the stock market’s performance and economic prospects is, amongst others, reflected by the expected future cash flows that companies are expected to make. But there may also be a wealth effect which predicts a positive relationship between stock market performance and consumption. Since the value of real estate also affects the willingness to consume, we also take a closer look at this particular topic in this research note. But before we do so, we will start with a general overview of China’s stock markets, its performance over the last 5 years and the measures that China’s government has implemented so far in order to prevent a further slump, which already evaporated a stunning amount of $7 tn during the recent lows in February. For more information regarding the real estate sector we refer to an earlier publication that covered this topic.

China’s stock markets experiencing a rout.

After a sharp recovery of China’s stock markets in 2021 – which was part of a global relief rally that followed the panic sell-off in March 2020 – 2022 saw investor sentiment souring and China was no exception. However, whilst Western indices recovered sharply thereafter, China’s stock markets struggled to keep up during the first half of 2023 and showed a very poor performance in the second half of 2023. The start to this year can only be characterized as a true stock rout. As a result, the benchmark MSCI China stock index is down 60% from its peak in 2021. All in all the total decline in value of China’s stock markets is approximately 7 tn renminbi (close to $1 tn) since the peak in 2021. The majority of these losses are borne by domestic holders of Chinese equities and retail investors in particular.

Some background on China’s stock markets

China’s restrictions related to foreign investments, geopolitical tensions and regulatory crack downs have soured foreign investors’ appetite for Chinese stocks and in October 2023 it was estimated that foreigners only hold $600 billion in Chinese stocks listed on mainland China or Hong Kong. This is indeed a small share of a total market capitalization that is estimated to be a little less than $9.7 tn in January 2024. While institutional investors’ share in Chinese stock holdings has significantly increased over the past two decades, China’s stock markets are still more influenced by retail investors than is the case in, for example, the United States. The box below explains some of the most common features of its stock market.

The structure of China’s stock market is important because it gives an idea of who has ownership and to what share classes. But for this it is clearly also relevant to have an idea about the total market capitalization of China’s main stock markets. This is why we show a table below that provides an overview of China’s stock exchanges ranked by market capitalization and which also includes the stock market returns YTD and for longer periods; It also provides an estimated breakdown between the share of private owned enterprises and state owned enterprises where available.

Connecting the stock market with consumption

While stock markets are less connected to the economic process and performance in China than is the case in most advanced economies (for instance, equity financing plays a relatively small role for China’s corporates who generally rely more on retained earnings and bank loans), the recent stock market rout adds to the wealth loss Chinese households already had suffered from China’s real estate crisis.

As can be seen from figure 4 below, surveyed consumers continue to signal weak confidence regarding developments related to employment and, related to it, income. Furthermore, consumer confidence is near record low levels. Moreover, close to 60% of respondents expect to increase savings in the next quarter while less than 25% of respondents indicate that they are expecting to consume more in the next quarter. We do note, though, that the most recent data is from Q2 2023.

Measures to support China’s stock markets

While most recently Beijing fired the head of the China Securities Regulatory Commission (CSRC) Yi Huiman and replaced him with Wu Qing, it is questionable whether this will result in the much needed restoration of investors’ confidence. However, as a previous head of the Shanghai Stock Exchange and in various roles within the CSRC, where he earned the nickname ‘the broker butcher’, it seems that a further crackdown on illicit trading practices is on the cards.

Several other measures have been announced, although the majority lacks details as is often the case when new policies and/or guidelines are announced. Below is a broad selection of measures that have been decided upon in recent months:

More liquidity support for developers
The CSRC announced it would look to support listed companies to find possibilities to merge and or restructure businesses in order to create value
Sales of stocks were also restricted for some domestic institutional investors as well as some offshore units of those investors
A lowering of 0.5% of the reserve ratio requirement for banks
Monetary authorities provided 1 tn yuan extra liquidity into the markets in order to provide ample liquidity
Promises to deal with margin call risks
More active involvement of the CSRC in addressing concerns from listed companies
Placing restrictions on security lending

More recently announced measures are:

Cease displaying real-time data for flows into the world’s second-largest stock market through Hong Kong
China’s ‘national team’ buying for $50 billion of stocks
Clarification of new delisting rules which are aimed at zombie firms
Tighten stock listing criteria
Crack down on illegal share sales
Strengthening the supervision of dividend payouts

While the PBOC has added additional stimulus since the end of last year, this stimulus still seems not to have fully fed into China’s economy and the real estate sector. Earlier this year, the PBOC offered 1 tn renminbi in loans to the banking sector and lowered the reserve requirement ratio by 0.5% bringing the average RRR for financial institutions to ‘about 7.0% after the cut’. A move that is expected to free up about 1 tn yuan according to the central bank chief who held a press conference in Beijing on Wednesday the 24th of January.

The last and perhaps most draconic measure announced this year is a ban on net stock selling during the first and last 30 minutes of a trading session. This measure came into effect on the 21st of February. This makes it harder for entities affected by this measure (mainly hedge funds and institutional investors) to apply certain trading strategies. At the same time it makes it easier for government-backed funds to influence the stock market during those crucial trading windows.

These measures clearly influence the extent to which stock valuations are determined by market mechanisms but they won’t increase the profitability of any company traded at any of China’s stock exchanges. It also remains to be seen how offshore investors will react on measures that increase the risk of not being able to sell your stocks anymore because of decreasing liquidity on the sellers’ market. Moreover, the restrictions on security lending are likely to have more effect on stocks listed on the Hong Kong exchanges than those listed in Shanghai. Mostly because stocks listed on the Shanghai stock exchange are held for more than 80% by individual investors vs 15% of stocks traded at the Hong Kong stock exchanges.

While Chinese stock markets initially showed a sharp recovery since their February lows, the stock rally seems to have stalled again since the midst of March. Taking all of the above into account, it remains to be seen whether the recent recovery of stock prices can be continued, especially when the current stock market trading curbs would be lifted again.

How the loss of wealth could lower consumption

Wealth effect

We will now look at a few behavioral phenomena when it comes to the relationship between wealth and consumption. This so-called wealth effect is a behavioral economic theory which postulates that peoples’ willingness to spend increases when the wealth of their homes or asset portfolio increases because they feel more financially secure. Since (for now) we want to exclude the extreme swings of consumption and stock market prices arising from the Covid-19 pandemic (which is even more relevant given China’s strict lock down measures and its obvious effect on consumption), we first use the results of an academic paper from 2010 which studies the importance of the wealth effect on China’s consumer spending.

This paper estimates a long run consumption elasticity of total assets to be around 0.51 or roughly one half. This would imply that a 20% drop in share prices would result in a drop of about 10% in consumption. Compared to Western elasticities, which are often found to be closer to 0.05, this is extremely high. Based on such a positive relationship between wealth and consumption, one would expect a significant negative impact on consumption from the recent decline in house and equity prices. The elasticity on income is estimated at 0.76, which seems plausible in our view.

Based on the elasticity from the paper above and given the price developments of the separate asset classes we can make a rough estimate of the impact of declining asset prices on consumption. We take 2021 as the starting point because the real estate crisis started in the summer of 2021 and we want to omit the results during the pandemic because of reasons discussed above. These estimates are shown in table 2 below. We abstain from the impact of increased saving via (bank) deposits.

This is based on a total value of real estate in China of $55tn in 2021. So, if we assume the elasticities from this paper to be realistic, this suggests that the decline in asset values has depressed consumption by some 3.4% since August 2021. This would amount to a drop of consumption of more than $2 tn! Given a level of nationwide per capita consumption expenditure of 26.796, a total population of 1.425.000.000 people and the current USD/CNH exchange rate of around 7.25, this would boil down to a total amount of consumption of $5.3 tn. Our estimates above are generally inline with other research indicating