The U.S & China Liquidity Issues is an Alarm

In continuation to the previous article https://www.ianalysis.co.in/2023/08/us-crisis-will-be-soon-global-guest.html , the global economy and the two largest economies are getting into a liquidity trap and this might impact global economics going ahead. Very soon we might find a downgrading of ratings for China and if not publicly but might be internally. The income inequality in China and U.S. are both wide enough. Chinese households retain the country’s GDP—roughly 60 per cent versus the roughly 80 per cent typical in the United States. The low household share of GDP has the same effect on demand as income inequality.  This inequality is going to create more problems for these two economies and this is the place where developing economies will grow big.

Well, we heard about Deflation in China and we made a quick comparison with Japan this week based on its macro numbers. Very soon you should all expect the authorities to ease financial and budgetary policies, housing regulations, and borrowing caps to finance infrastructure. Further, there will be here might even be measures that look consumer-friendly. This pushes the global markets into new highs and Asian markets too.  But the biggest question is that will the same help China to get out of the slowdown snowball and also how this snowball is benefitting other countries.  But sorry this time China may not be able to come out of the issues which have now turned to mountains.

Being in India or Mexico every country will pray that China should lose its power of trade and investments and the share of control should now head towards developing nations. We have heard many times that the global supply chain is changing but what we did not look into is the speed of change.

The shift in manufacturing and trade is happening much faster. For example, Mexico’s share of U.S. imports matched China’s in June. The free-trade agreement between the U.S., Mexico and Canada has made Mexico a strong contender against China and other Asian nations as a supply base to the U.S. When the dollar values of exports and imports are combined, Mexico is now the U.S.’s No. 1 trading partner, followed by Canada, pushing China to third place. Buyers are turning to Mexico, Europe and other parts of Asia for wares ranging from computer chips and smartphones to clothing. India’s share of U.S. smartphone imports reached 5.3% for the year ending in June, up from 1.8% for the 12 months ending in December.

Some of the countries that are becoming popular destinations for companies that are moving manufacturing out of China include Vietnam, India, Mexico, Indonesia, and Bangladesh. These countries offer lower labour costs, a more stable political environment, and closer proximity to major markets.

The recent Mr Biden semiconductor and chip policy is a major blow over and above the Mr Trump trade war policies.   China might come up with billions of packages and other stimulus measures but that won’t work this time of the Decade since major importing countries from China now knows the mistake of over-dependency on one country.  This time the impact on the Chinese economy will be longer despite takings several measures for revival of the business and trade within China.

Few key points to dig our why China will fail despite stimulus measures announced by its own:

• Its employment is dependent on FDI investments and any shift out from the same creates significant outflow and leads to higher unemployment

• Higher unemployment leads to significant savings by Chinese households and hence less consumption. You must remember that China does not have social measures like other countries.

•  Current consumption has generally been very subdued, especially for big-ticket items such as cars and houses, and private investment, the backbone of China’s economy.

•  When domestic consumption takes set back and people are sceptical about the job market and higher unemployment of youth creates a significant slowdown for domestic manufacturers.

•  Youth unemployment has topped 21%, or double what it is in the UK and almost three times the rate in the US.

•   Private sector of China has been spending very less as the norms are stringent and hence Private firms and entrepreneurs are not spending much on investment or on hiring people.

•   If we look at the number of employment we find that the annual graduation of 11-12 million students in the summer is aggravating an already difficult situation because of the problems of finding suitable work.

•  Pay wages are falling and as high tech and FDI are slowly moving out due to the so-called Supply Chain shift the jobs are mostly in the lower-pay, low-skill, gig or informal economy compared with higher quality jobs in manufacturing and construction.

•   Most of the housing stock, overbuilding, collapse in transactions and weakness in prices are not in big agglomerations such as Beijing, Shenzhen and Shanghai, but in hundreds of smaller cities and towns that rarely make news.

 Well, U.S Election and Mr Biden's strategy are well played for targeting to create domestic jobs at the time of elections scheduled for Nov -2024. Every Presidential election attracted some type of war and now the trade war is the new weapon. Now this strategy has been identified by Britain and the European Union who have signalled their intention to move along similar lines, and the Group of Seven advanced economies agreed in June that restrictions on outbound investments should be part of an overall.

A quick look towards the economic Numbers of China

•  Year-to-date, China's exports are down 5% compared to last year, while imports have dipped 7.6%

•  Manufacturing activity has contracted for four straight months

•  July exports declined at the sharpest rate in three years, at 14.5% annually

• The US Census Bureau reported Chinese exports to the US dropped 23.7% in June, hitting a six-month low of $42.7 billion

The recent numbers from China speak loudly- China accounted for 13.3% of U.S. goods imports during the first six months of this year, below a peak of 21.6% for all of 2017. The current level is the lowest since 12.1% for the year 2003, two years after China’s accession to the World Trade Organization.

This shift out leads to a big hole for the Chinese economy since, over the past 2 decades they have created a huge mountain of debt unprofitable and un-commercial infrastructure and real estate, empty apartment blocks and little-used apartments and transport facilities, and excess capacity in, for example, coal, steel, solar panels and electric vehicles. Now these facilities are going to be turned into ideal and youth unemployment will create major setbacks. Further Chinese domestic investments will not rise so early nor can fill up the GAP created under the current circumstances.

We will witness commodity prices will fall which might trigger margin calls in commodities and industrial inflation will be on the lower side giving immense benefit to developing nations. Financial and liquidity crises from China might come up and most of the funds will be used for bailout.

The global risk is now for liquidity crisis and in certain ratings getting upside down across various sectors and assets class. The debt market will witness a major setback in coming late 2023.