US-China economic pressure hotline timely connection – Asia Times

The US-China agreement to name people who will deal with “future financial stress events” in the world’s two largest economies could not be better timed.

This discussion plan is the most prominent from last week’s meeting of the Financial Working Group that was formed last year following the visit of US Treasury Secretary Janet Yellen in 2023 to China.

The idea, according to the People’s Bank of China, is to facilitate “professional, pragmatic, candid and constructive” bilateral discussions on financial markets, cross-border payments and monetary policy approaches.

Although it may not seem like a big deal, the move to exchange the “financial stability index” will help as the opportunities for the global economy and financial markets are increasing day by day. and the sun.

The American economy is currently booming. After reading the latest data, count Barclays strategist Erick Martinez among those who have “returned to America’s comfort zone.” Martinez points to the recent decline in stocks that were sold as fears of a US recession were growing earlier.

However there is still room for some amazing surprises. For every investor who worries the US Federal Reserve has been too slow to cut rates, there’s another who thinks chairman Jerome Powell’s team has already pulled too hard in the face of high inflation. stubbornly.

For any trader who bets that the “King Dollar” will continue to defy gravity, one is looking at the US national debt of more than US $ 35 trillion in extreme danger.

This is especially true since Brazil, Russia, India, China and South Africa, BRICS, have led the charge among the Gulf region and the countries of the Global South to break the dominance of the dollar and make notable progress.

Never mind the November 5 election in the United States, which will almost certainly end in chaos if Donald Trump loses again. When the former US president lost in 2020, the rebellion he instigated in the US Capitol lowered America’s credit rating as well.

In August 2023, when Fitch Ratings canceled Washington’s AAA rating, it said that polarization, reflected in the coup of January 6, 2021, was the key to the decision. As the analyst of Fitch, Richard Francis said, the revolution was “an indication of the corruption of the government” which puts the US finances at risk.

The chances of Trump conceding defeat to Democratic Party incumbent Kamala Harris in November are virtually non-existent, many political and market observers believe. Could that cause Moody’s Investors Service to remove America’s final AAA credit rating?

Trump’s success could give the US-China “new financial stability agenda” more reasons for contact. Right out of the gate, Trump 2.0 may want to make trade wars big again if the former leader sticks to his campaign promise of 60% tariffs on Chinese goods and tariffs. which are extensive in all imports.

The risks from China, meanwhile, are high and increasing. Falling house prices continue to depress property investment and dampen consumer spending.

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

Construction activity “remained surprisingly weak,” says Lynn Song, chief China economist at ING Bank. He adds that “we believe there is still a strong case for further easing later this year.”

Lynn argues that “weak credit, low inflation, and soft growth should provide more reason for easing, and if downward pressures on the yuan ease after” for the US to taper, there should be no stopping the PBOC from tapering further.”

The PBOC has indeed been cutting rates. For example, on July 22, the PBOC reduced the one-year interest rate to 3.35% from 3.45%. It was the first cut since August 2023.

For economist Zhang Zhiwei, president of Pinpoint Asset Management, it was “a step in the right direction.” But, Zhang says, “fiscal policy is not the most important policy tool. The economic outlook in (the second half of the year) depends a lot on how the fiscal policy will support.”

For President Xi Jinping’s team, the financial part of the puzzle remains a work in progress. As the economists at Societe Generale point out, the usual policy of boosting the use of infrastructure will not produce the necessary results at this time. Nor will it increase exports, especially since the West is building defense walls against them.

“The Chinese economy, because of its size, cannot operate on manufacturing and exporting alone,” Societe Generale wrote. “To reach the 5% growth target – if it is still a target – policymakers need to strengthen support for domestic demand.”

It is clear that “economic strength has weakened,” says economist Ding Shuang of Standard Chartered Plc. “This has created many challenges to the target of achieving growth of around 5% this year, and policy makers will also see this.”

Neralla Rama Ravi Teja, an analyst at GlobalData, said “the rise in household consumption will give an impetus to the pace of shopping in these stores. Moreover, since the goods and imports sector is pulling in difficult, the country’s economic stability depends on increasing consumer spending and restoring consumer confidence.”

However, Teja adds, “China will have to reduce its reliance on manufacturing and focus on the service sector. The government may introduce other measures to increase household consumption.” in the near future.”

Rory Green, chief China economist at TS Lombard, notes that “we continue to see consumption decline” as confidence, income and wealth fall due to weaker assets and Stocks destroy growth.

This year, China may be in the midst of its first annual exit from equities as investors pay attention to economic conditions. At the same time, China’s overwork problems are creating new problems in various sectors.

Earlier this month, Hengchi, the electric vehicle (EV) maker of China Evergrande Group, went bankrupt. Hengchi is not alone in its cash-strapped state, struggling to meet obligations to creditors and, in some cases, local governments.

In fact, the causes of China’s excessive suffering are not obvious, says economist Yang Yao at the National Development School of Peking University. There is a good argument that China is enjoying the fruits of moves to increase production as a way to increase its pricing power.

Yao argues: “The extent of China’s overcapacity problem has become more apparent in recent years. “While China’s economy accounts for 17% of the world’s GDP, it produces 35% of the world’s output. Exports have offset this imbalance, but due to falling global demand and rising political tensions, Chinese exporters are still being forced to compete on prices. ”

How can China solve its overproduction problem? Yao says: “The obvious solution is to increase domestic demand. However, this requires a behavioral change to save people, which may take time. In addition, due to the refusal to take on debt, there is doubt that the government will increase its spending. ”

Meanwhile, “unfortunately, the growing political tension has pushed many countries, including the US and China, off the right track,” says Yao. “Given the potential global consequences of the Sino-American recession, it is imperative that both countries take the lead and work together to get the global economy back on track.”

The good news is that Beijing and Washington are now exchanging a list of names of financial stability to deal, hopefully in real time, with future events of financial stress.

That, as the PBOC puts it, “will enable the financial management departments of both parties to maintain timely and convenient channels of communication and reduce the uncertainty of financial stress levels and risks.” operations of financial institutions take place.”

The bad news is that these connections will become clear sooner and more often when the global financial system enters a period of turmoil. Maybe 24/7.

Follow William Pesek on X at @WilliamPesek