US-China Financial Stress Hotline A Well-Timed Connection

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The odds of Trump admitting defeat to Democratic Party standard bearer Kamala Harris come November are essentially nil, many political observers and market watchers believe. Might that prompt Moody's Investors Service to yank away America's last AAA credit rating?

A Trump victory could give the new US-China“financial stability contacts list” plenty of cause to get in touch. Out of the gate, Trump 2.0 would likely seek to make trade wars great again if the ex-leader is true to his campaign trail rhetoric threatening 60% taxes on Chinese goods and broader levies on all imports.

Risks emanating from China, meanwhile, are high and rising. Falling home prices continue to suppress property investment and undermine 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).

Construction activity“unsurprisingly remained weak,” notes Lynn Song, chief Greater China economist at ING Bank. He adds that“we believe that there remains a solid case for further easing later this year.”

Lynn argues that“weak credit, low inflation, and soft growth should provide plentiful reasons for easing, and if yuan depreciation pressures wane after US rate cuts kick-off, there should be little holding the PBOC back from further cuts.”

The PBOC has indeed been cutting 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 such cut 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 economic outlook in (the second half of the year) critically depends on how supportive fiscal policy will become.”

For President Xi Jinping's team, the fiscal piece of the puzzle remains a work in progress. As economists at Societe Generale point out, the typical strategy of boosting infrastructure spending won't produce the needed multiplier effect this time around. Nor will simply upping export shipments , particularly as the West builds protectionist walls against them.

“The Chinese economy, given its size, cannot run on manufacturing and exports alone,” Societe Generale wrote.“To hit the 5% growth target – if that's still the target – policymakers need to step up support for domestic demand.”

It's clear the“economy's momentum slowed,” notes economist Ding Shuang at Standard Chartered Plc.“This has posed more challenges to the goal of achieving around 5% growth this year, and policymakers would see this too.”

Neralla Rama Ravi Teja, analyst at GlobalData, said that“an uptick 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.”

Yet, Teja adds,“China will have to reduce its dependence on manufacturing and shift its focus towards the services sector. The government is likely to introduce more measures to boost its household consumption in the near future.”

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.

This year, China may be on the verge of its first year of outflows from equities as investors grow wary of the economic outlook. 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. Hengchi is hardly alone in being severely short of funds and struggling to navigate obligations to creditors and, in some cases, local governments.

To be sure, the causes of China's overcapacity woes aren't straightforward, notes economist Yang Yao at the National School of Development at Peking University. There's a good argument that China is enjoying the fruits of moves to boost productivity as a means to increase its pricing power.