The Chinese government is trying to get back animal spirits of both businesses and households by signalling policy support and by trying to restore confidence badly dented by Xi’s earlier crackdown on businesses. The legendary Richard Koo, who coined the term ‘balance sheet recession’ during the Global Financial Crisis, has said China too could be facing such a crisis, similar to the Japanese malaise, thanks to its borrowing spree. Time to buy Alibaba, down 68 percent from its peak?īut there are still plenty of questions hanging over the Chinese economy, which is why the response of the Chinese equity markets has been underwhelming. Chinese cities have started launching property support measures. On Tuesday, Xinhua reported that the country unveiled 28 detailed measures to be applied in the near future, ranging from fair market access to stronger financial support and better government services, to tackle problems that private enterprises are facing, and stimulate the development of the private economy. The Chinese authorities are laying out the red carpet for investors once again. This FT article exhorts Beijing to start spending so that the problem does not become a crisis. The other big story, albeit a continuing saga, is about the increasingly frantic attempts by the Chinese leadership to prop up the economy. The story has loads of information, including this gem: “Ian Fleming chose the name Bond for his spy because he thought it was ‘the dullest name I’ve ever heard’.” This FT story, free to read for Moneycontrol Pro subscribers, says the bond market is now facing one of its biggest tests in generations. With the supply of US Treasuries increasing on the one hand and with the Fed’s quantitative tightening on the other, bond prices should fall and the upward pressure on bond yields should continue. That global economic growth is easing at the beginning of the third quarter of 2023 is seen from the JPMorgan Global Composite PMI, which fell to 51.7 in July from 52.7 in June. Dalio says that if the fiscal situation doesn’t get out of hand, “a period of tolerably slow growth and tolerably high inflation (a mild stagflation) is most likely”. It is also likely that this is what has kept the equity markets high and financial conditions loose. What the Fed proposes, fiscal policy disposes. As a result of this coordinated government manoeuvre, the household sector’s balance sheets and income statements are in good shape while the government’s are in bad shape.” Simply put, the resilience of the US economy to the Fed’s rate hikes and the deterioration of US government finances pointed out by Fitch are two sides of the same coin. The upshot, says Dalio, is: “This made the private sector relatively insensitive to the Fed’s very rapid tightening to a more normal monetary policy. That brings us to billionaire investor and Ray Dalio’s latest post on in which he makes the point that the build-up of government debt in the US is the result of the handouts given during the pandemic. It says, “As the result of the high current US government debt-to-GDP ratio and continuing projected deficits, we face a possible dollar inflation uncertainty nightmare: Continuing deficits, if unchecked, eventually will lead to a fiscal dominance problem… A significant rise in long-run real interest rates also seems quite possible… leading to a messy monetisation in the US, with ramifications worldwide.” Here’s a view from the Federal Reserve Bank of St Louis, in a paper titled ‘Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements’ that should rattle the soft-landing crowd. But my colleague Aparna Iyer cautioned that the US can no longer afford to blithely print its way out of trouble. This story too said the hit to investor sentiment is likely to be limited. Our columnist Subir Roy echoed the mainstream sentiment when he headlined his piece, ‘US credit rating downgrade no big deal’ - the markets have no love lost for rating agencies. Why did Fitch Ratings downgrade US sovereign debt from AAA to AA+? The key reason is in this line from the Fitch commentary: “We expect the general government (GG) deficit to rise to 6.3 percent of GDP in 2023, from 3.7 percent in 2022, reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden.” What’s more, the rating agency said, “Fitch does not expect any further substantive fiscal consolidation measures ahead of the November 2024 elections.” The downgrade led to an immediate spike in US long-term yields on concerns of higher borrowing, which in turn led to a sell-off in the equity markets.
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