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China’s economy is slowing down. No one knows what comes next.
“We’ve never seen it before and don’t quite know what it’s going to do,” Kenneth Rogoff, a Harvard professor and former International Monetary Fund chief economist, told MM.
The prospect of a protracted slump for the world’s second-largest economy poses a serious threat to global growth at a time when central bank policymakers are still recovering from the pandemic’s aftermath, soaring inflation and rising geopolitical tensions. Even if the near-term impact to the U.S. economy is minimal — for now, that’s more or less the consensus view — the long-term implications affect everything from debt markets to global supply chains.
That “cannot just be wished away,” said Josh Lipsky, a former State Department and IMF official who’s now the senior director of the Atlantic Council’s GeoEconomics Center. A sputtering China would “change some of the fundamentals of how the global economy has been wired over the past several decades,” he added.
The scope of the challenges facing China emerged within months of President Xi Jinping unwinding harsh lockdown policies intended to contain Covid-19’s spread. While the late-2022 pivot from “zero Covid” fueled hopes of a boom, cracks began to show in the country’s all-important property sector by late spring. Corporate defaults escalated, youth unemployment surged and consumer prices fell, amplifying fears that a contagion could soon spread beyond its borders.
A financial crisis is unlikely, said Rogoff, who’s warned of the risks posed by China’s soaring level of debt for years. But that doesn’t mean there won’t be pain, particularly for emerging markets that rely on Chinese goods markets for both imports and exports.
“Having that level of stress on emerging markets, on Asia, has to boomerang on the United States to some extent,” he said.
Treasury Secretary Janet Yellen made a similar point earlier this summer when she said that China’s slowdown could spill over into the U.S., though she and other Treasury officials have downplayed the possible severity. Indeed, according to a half-dozen other top economists and Wall Street executives, the links between U.S. and Chinese financial systems are minimal.
And while China is still a critical trading partner, any slack in demand for U.S. exports would have little effect. Some have even argued China’s weakening demand for goods and commodities might help cool inflation.
Even so, one former top official at Treasury and the IMF who was granted anonymity to speak frankly said that if the slowdown ultimately leads to a contraction in China’s manufacturing sector, it could disrupt supply chains that have helped keep prices low for decades.
“China is still a very important market,” said Chad Moutray, chief economist for the National Association of Manufacturers. “We’ve built up pretty sophisticated supply chains over the last couple of decades. It’s not going to be easy for us to just flip a switch and be gone.”
Still, even with limited ties to the U.S. financial system and slowing relationship on trade, “in this environment, the biggest failures are going to be failures of imagination,” Daleep Singh, PGIM Fixed Income’s chief global economist and a former Biden White House official, said in an interview.
“The scenario that we should worry about most is — I think — is an abrupt turn to autarky and suppression [within China] alongside intensified aggression abroad that explicitly subordinates economic objectives to geopolitical aims,” said Singh, who was a key architect of Biden’s sanctions policy against Russia.
IT’S TUESDAY — Welcome back! It was a Jersey-heavy week for your host without this newsletter: Springsteen at the Meadowlands, a weekend down the shore, burgers at White Mana Diner on Tonnelle. Still the best state, non-California Division. Send tips, gossip and suggestions to Sam at [email protected] and Zach at [email protected] (Zach’s back!)
TUESDAY … Center for Global Development holds a virtual discussion with Treasury Undersecretary for International Affairs Jay Shambaugh at 10 a.m. … The Senate will consider Fed Gov. Philip Jefferson for vice chairman at 3 p.m.
WEDNESDAY … National Association for Business Economics holds a virtual discussion, beginning at 9 a.m., with former St. Louis Fed President Jim Bullard. … The ISM services survey is out at 10 a.m. … The Fed will release its Beige Book at 2 p.m. …
THURSDAY … The Philadelphia Fed kicks off its annual two-day fintech conference at 9 a.m. Philly Fed President Patrick Harker, CFPB Director Rohit Chopra and Fed Gov. Michelle Bowman are on the official schedule … The Aspen Institute holds its third annual Latino Business Summit starting at 9 a.m. … Sen. Bill Hagerty, (R-Tenn.) will speak at a Cato Institute event on crypto at 9:35 a.m. … Senate Banking has a hearing on the property insurance market at 10 a.m. …
FRIDAY … Fed Vice Chair Michael Barr speaks at the Philly Fed conference at 9 a.m.
Hope you’re not hungover — Because Eleanor Mueller has the low down on what’s going to be a very busy September. A few highlights:
In cryptoland, House Financial Services Chair Patrick McHenry (R-N.C.) is jockeying to get his market structure bill to the floor for a vote. Meanwhile, Senate Banking Chair Sherrod Brown (D-Ohio) has been in discussions with the White House on how to proceed on digital assets after Sen. Elizabeth Warren’s (D-Mass.), among others, wrangled anti-money laundering language into an NDAA manager’s amendment.
— Brown and ranking member Tim Scott’s (R-S.C.) RECOUP Act is also on the docket for September, with supporters hoping that broad bipartisan support could push it to the floor after Senate Majority Leader Chuck Schumer again included it in his lookahead for the month.
— And SEC Chair Gary Gensler is expected to testify before Senate Banking on Sept. 12 and House Financial Services on Sept. 27. Wall Street and the crypto industry lobbies are itching to make Gensler’s trips to the Hill a rock fight. Speaking of which…
If Gensler “blinked,” it wasn’t hard enough — Wall Street industry groups representing private equity firms, hedge funds, asset managers and big banks filed a petition in the Fifth Circuit to block the SEC’s new private funds rule, setting the stage for a legal battle that threatens a cornerstone of Gensler’s regulatory agenda.
The rule — as Declan and I wrote on Friday — was touted “as a way to bolster the transparency and integrity of markets run by private equity giants, hedge funds and venture capitalists.” But even after the SEC removed some of the proposal’s biggest reforms, they still claim that they were blindsided by the final version.
“We didn’t get the opportunity to comment on this new regime — and the changes are unworkable,” Drew Maloney, who leads the Washington-based private equity industry group the American Investment Council, told MM.
The nature of the challenge, which is being argued by former Trump Labor Secretary Eugene Scalia — a frequent Gensler foe — could have serious implications for other SEC rules as well.
If the SEC loses, “the vast majority of both the Investment Company and Investment Advisers act could be fair game to shoot down,” Ty Gellasch, a former Senate staffer who wrote parts of Dodd-Frank and now leads the Healthy Markets Association, told MM.
Solid — Our Jasper Goodman: “President Joe Biden touted a solid monthly jobs report Friday, saying the country is in ‘one of the strongest job-creating periods’ in its history while seeking to draw a contrast with the Trump administration.”
— Administration officials like Acting Labor Secretary Julie Su, Commerce Secretary Gina Raimondo, NEC Director Lael Brainard and CEA Chair Jared Bernstein fanned out across cable news to talk up the strong labor market and Biden’s broader economic policy agenda. The president penned an op-ed in the Milwaukee Journal Sentinel to tout “Bidenomics.”
— But voters still aren’t buying it. A new Wall Street Journal poll found overwhelming disapproval of Biden’s handling of the economy. What’s more, he’s also tied in a head-to-head with former President Donald Trump in a likely rematch in 2024. “Voters are looking for change, and neither of the leading candidates is the change that they’re looking for,” Democratic pollster Michael Bocian, who led the survey with GOP pollster Tony Fabrizio, told the WSJ.
Deficit — The Washington Post’s Jeff Stein: “The federal deficit is projected to roughly double this year, as bigger interest payments and lower tax receipts widen the nation’s spending imbalance despite robust overall economic growth.”
— Still, inflation has cooled even as deficits soared, an outcome that serves as a reminder that “wider deficits don’t always lead to higher inflation, a potentially important lesson as the gap between spending and revenue grows in the future,” writes The WSJ’s Andrew Duehren.
Zero Hedge — Bloomberg’s Farah Elbahrawy: “US stock investors have gotten so confident that it’s concerning strategists at JPMorgan Chase & Co.‘There is complacency in sentiment evident, VIX is near record low and positioning has increased’ to above-average levels, a team led by Mislav Matejka wrote in a note.”
Signs of relief? — Reuters’s Xie Yu and Carolina Mandl: “Country Garden’s … deal with creditors for an extension on onshore debt payments worth 3.9 billion yuan ($536 million) boosted shares in the developer on Monday and gave China’s crisis-ridden property sector some much-needed respite.”
