Debt (Page 19)

It could hardly be much timed for the US and China to announce how to handle upcoming “financial stress occasions” in the country’s two biggest economies and above.

This dialogue platform is the most renowned product from last week’s conference of the Financial Working Group&nbsp, created next season following US Treasury Secretary&nbsp, Janet Yellen’s 2023 China visit.

The idea, according to the People’s Bank of China, is to help “professional, logical, candid and creative” diplomatic discussions on money markets, cross-border bills and monetary policy styles.

The exchange of “lists of economic stability connections” will be beneficial as the chances of the world economy and financial markets becoming unstable grow by the day.

At the moment, the US market is on quite a move. Consider Barclays planner Erick Martinez among those who are “back to the US soft-landing scenario” after perusing the most recent data. Martinez factors to the recent rise in currencies, which boosted fears of the US recession previously.

But there’s still enough scope for unpleasant surprises. Another investor is concerned that Jerome Powell’s group is now acting very weak in the face of persistently high inflation, just like the US Federal Reserve has been.

For any businessman betting” King Dollar” may continue to defy weight, another is eyeing the US federal loan topping US$ 35 trillion with extraordinary dread.

That’s especially so as Brazil, Russia, India, China and South Africa, the BRICS, lead a demand among Gulf area and International South nations to tear the dollar’s dominance and make significant progress.

Never mind the US vote on November 5, which is almost certain to go down in secrecy if Donald Trump loses. The uprising he sparked at the US Capitol caused America’s credit score to fall along with it when the former US president lost in 2020.

In August 2023, when Fitch Ratings revoked Washington’s Professional position, it said fragmentation, partly reflected in the January 6, 2021 rebellion, was vital to the decision. The insurrection was a “reflection of the deterioration in governance,” as Fitch analyst Richard Francis put it, putting US finances at risk.

Many political observers and market observers think that Trump’s chances of admitting defeat to Democratic Party standard bearer Kamala Harris in November are essentially nonexistent. Might that prompt Moody’s Investors Service to yank away America’s last AAA credit rating?

A Trump victory might be a good thing for the newly established US-China “financial stability contacts list.” If the ex-leader sticks to his campaign trail rhetoric, which threatened to impose 60 % taxes on Chinese goods and broader import taxes, then Trump 2.0 would likely try to start a great trade war once more.

Risks emanating from China, meanwhile, are high and rising. Home prices that are falling continue to lower property investment and lower consumer spending.

In the first seven months of 2024, China’s fixed-asset investment growth slowed more than expected, rising just 3.6 % to 28.7 trillion yuan ($ 4 trillion ).

According to Lynn Song, ING Bank’s chief economist for Greater China, “unsurprisingly remained weak.” He continues,” we think that there is still a strong case for further easing later this year.”

According to Lynn, “weak credit, low inflation, and soft growth should provide abundant reasons for easing, and there should be little holding the PBOC back from further cuts” if yuan depreciation pressures decline after US rate cuts begin.

Indeed, the PBOC has been lowering rates. On July 22, for example, the PBOC cut the one-year loan prime rate benchmark to 3.35 % from 3.45 %. It was the first cut in this category since August 2023.

To economist Zhang Zhiwei, president of Pinpoint Asset Management, it was a” step in the right direction”. But, Zhang says, “monetary policy is not the most important policy tool. The impact of fiscal policy on the second half of the year is crucial.

For President Xi Jinping’s team, the fiscal piece of the puzzle remains a work in progress. The typical strategy of increasing infrastructure spending wo n’t, according to Societe Generale’s economists, produce the required multiplier effect this time around. Nor will increasing export orders be done, especially as the West constructs protective walls against them.

” The Chinese economy, given its size, cannot run on manufacturing and exports alone”, Societe Generale wrote. If domestic demand is still the target, policymakers must increase support for it in order to meet the 5 % growth target.

It’s clear the “economy’s momentum slowed”, notes economist Ding Shuang at Standard Chartered Plc. Policymakers would also be concerned about the goal of achieving 5 % growth this year because of this.

Neralla Rama Ravi Teja, a GlobalData analyst, stated that” an increase in household consumption will give a push to the consumer footfall at these outlets. In addition, with the property sector and exports struggling, the country’s economic stability is dependent on increasing consumer spending and restoring consumers ‘ confidence”.

Teja continues,” China will have to reduce its dependence on manufacturing and shift its focus to the services sector.” In the near future, the government is likely to take additional measures to increase its domestic consumption.

Rory Green, the chief China economist at TS Lombard, notes that” we continue to see consumption decelerating” as confidence, income and negative wealth effects caused by weak property and stocks undermine growth.

As investors become more wary of the outlook’s economic outlook, China may be in the middle of its first year of outflows from equities this year. At the same time, China’s overcapacity troubles are causing new strains in different sectors.

Earlier this month, Hengchi, an electric vehicle ( EV ) maker owned by China Evergrande Group, went bankrupt. Being severely short of money and having to deal with obligations to creditors and, in some cases, local governments are not alone.

To be sure, the causes of China’s overcapacity woes are n’t straightforward, notes economist Yang Yao at the National School of Development at Peking University. There is a strong argument that China is benefiting from efforts to boost productivity in order to strengthen its pricing position.

” The extent of China’s overcapacity problem has become increasingly evident in recent years”, Yao argues. ” While the Chinese economy accounts for 17 % of global GDP, it&nbsp, produces 35 % &nbsp, of the world’s manufacturing output. Exports have historically helped to balance this imbalance, but in the face of declining global demand and escalating geopolitical tensions, Chinese exporters are increasingly being forced to compete on price.

How can China address its overcapacity issue? The” seemingly obvious solution”, Yao says, “is to increase domestic demand. However, this requires changing the population’s saving behavior, which would take time. Moreover, given its aversion to taking on debt, it is doubtful that the government will boost its spending”.

In the meantime, “regrettably, increased geopolitical tensions have knocked many countries, including the US and China, off the optimal path”, Yao says. It is incumbent on both nations to lead and collaborate to restore the world economy in light of the potential global repercussions of Sino-American decoupling.

The good news is that Beijing and Washington are now able to exchange lists of financial stability contacts to deal with any upcoming financial stress events, hopefully in real time.

According to the PBOC, that will “help financial management departments of both sides maintain timely and smooth communication channels and lessen uncertainty when financial stress events and financial institutions’ operational risks occur”

The bad news is that as the world financial system enters a uniquely chaotic period, these channels of communication are sure to be roost early and frequently. Perhaps 24/7.

Follow William Pesek on X at @WilliamPesek

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