Jim Hilderbrandt’s Post

China recently faced two conflicting policy developments. How are these developments interconnected and how will they impact the economy and markets? Explore this and more.

China recently faced two conflicting policy developments. How are these developments interconnected and how will they impact the economy and markets? Explore this and more.

China recently faced two conflicting policy developments. How are these developments interconnected and how will they impact the economy and markets? Explore this and more.

Thoughts for Dow Jones Market Talk: "#China's upcoming #ThirdPlenum will likely only unveil moderate and gradual measures to address key economic problems like a stagnant real-estate sector to local government debt. Given a lack of alternative revenue sources other than land sales, officials at the meeting will likely announce a higher tax allocation to local governments. The difficulty in simultaneously achieving both economic and fiscal targets is a key reason that only moderate policies will likely be announced. China's future growth model requires a shift to high-skilled manufacturing and stronger local government finances, but that's unlikely to be achieved in the short term."

China's fiscal stimulus is losing its effectiveness, S&P says S&P Global Ratings reports that China's fiscal stimulus is waning in effectiveness, now serving as a temporary measure to support industrial and consumption upgrades rather than stimulating immediate economic growth. Despite setting an ambitious GDP growth target of around 5% for the year, high debt levels across various regions constrain the potential impact of these fiscal measures. Local governments are expected to shift focus towards improving business environments and supporting long-term growth through structural reforms rather than relying heavily on investment, particularly in the sluggish property sector. #Chian #economy #financialmarket https://lnkd.in/gUJmY_eU

I shared some thoughts with The Wire China lately on how China plans to achieve its economic agenda. The banking sector is playing an insufficient role in channelling funds to policy priorities. But for Chinese firms, they have long relied heavily on their retained earnings to make investment. According to China's flow of funds data, more than 80 percent of non-financial corporations' fixed asset investment was made using their retained earnings in 2021. The share has long been high: It was around 70 percent in the 2000s, then dropped to 50-60 percent in the ensuing decade, and rose again to 70-80 percent again in recent years. So it looks like for now, the success of China's economic agenda won't hinge on resolving the financial sector's problems. Moreover, the Chinese state has a variety of tools in its industrial policy toolkit to pursue its developmental goals. The government, especially local governments, are active investors through thousands of industrial guidance funds, for example, in promising private companies in policy priority areas. https://lnkd.in/eK7UvNwy

Interesting piece on China by Capital Group: China’s exports are likely to keep falling in price, causing headaches for overseas competitors. However, the inflation problem faced by the U.S. and other developed countries primarily stems from the service sector and domestic wages. Consequently, China may not play a significant role in central banks’ efforts to combat inflation.’

U.S. Officials to Visit China for Economic Talks as Trade Tensions Rise https://ift.tt/JD29mBo A group of senior Biden administration officials is traveling to Shanghai this week for a round of high-level meetings intended to keep the economic relationship between the United States and China on stable footing amid mounting trade tensions between the two countries. The talks will take place on Thursday and Friday and are being convened through the U.S.-China Financial Working Group, which was created last year. Officials are expected to discuss ways to maintain economic and financial stability, capital markets and efforts to curb the flow of fentanyl into the United States. Although communication between the United States and China has improved over the past year, the economic relationship remains fraught because of disagreements over industrial policy and China’s dominance over green energy technology. The Biden administration imposed new tariffs in May on an array of Chinese imports, including electric vehicles, solar cells, semiconductors and advanced batteries. The United States is also restricting American investments in Chinese sectors that policymakers believe could threaten national security. The U.S. delegation, which is scheduled to depart on Monday, is being led by Brent Neiman, the Treasury Department’s assistant secretary for international finance. He will be joined by officials from the Federal Reserve and the Securities and Exchange Commission. They are expected to meet with the People’s Bank of China’s deputy governor, Xuan Changneng, and other senior Chinese officials. “We intend for this F.W.G. meeting to include conversations on financial stability, issues related to cross-border data, lending and payments, private-sector efforts to advance transition finance, and concrete steps we can take to improve communication in the event of financial stress,” Mr. Neiman said ahead of the trip, referring to the abbreviation for the financial working group. American and Chinese financial regulators have been conducting financial shock exercises this year to coordinate their responses in the event of a crisis, like a cyberattack or climate disaster, that might affect the international banking or insurance systems. The Biden administration has been urging China to take action to prevent chemicals used to produce fentanyl from being exported to other countries and smuggled into the United States. There were signs of progress this month when China announced that it would put new restrictions on three of these chemicals, a move that the United States described as a “valuable step forward.” Other economic issues between the two countries continue to be contentious. Treasury Secretary Janet L. Yellen pressed Chinese officials during her trip to China in April to stop flooding global markets with cheap clean-energy products, warning that its excess industrial capacity would distort global supply chains. But after a meeting of Communi...

Wonderful piece by Michael Pettis on the 2 reasons that explain China’s structural trade surplus with the rest of the world.    “Excess Chinese capacity in targeted industrial sectors is one area of contention. Excess Chinese savings driven by the suppression of domestic demand is another issue. These two points of contention are very different but analysts and policymakers on either side seem to confuse the two.”  A cautious note from myself: don’t use China as an example or an excuse to pursue similar policies where they have no chance to succeed!  https://lnkd.in/dVi7tfhe

China's economic signals at the National People's Congress dissapointed markets that had hoped stronger stimulus measures. However, I think there were a few signs that efforts to support the economy will be stepped up: First, the 5% target is more ambitious this year as unfavourable base effects will make it more difficult to reach compared to 2023. Second, Li Qiang announced the government will issue ultra-long bonds for several years starting this year with issuance of 1 trillion yuan for major projects. This has only been done three times before over the past four decades. Third, measures to consumer spending got around a half page space in this years’ report versus five lines last year. Finally, the real estate sector gets more focus with a statement that subsidized housing will be scaled up. Still, one could have hoped for a stronger signal of how the government plans to deal with the continued decline in home sales that is a symptom of weak household confidence and reinforcing the uncertainty felt by many people. More takeaways from the Chinese government's work report below. #china #chinaeconomy #npc