Crypto News: China's gift: a Goldilocks economy

As most of the world's major central banks fight inflation with rate hikes, China is re-emerging from strict Covid policies and set for a boom. The question is whether the added demand helps or hurts the global economy. And with tensions running high between Beijing and Washington, what does China's growth target say about their macro policy?

A decade and a half ago, when the global economy buckled due to ructions in the financial system, China's stimulus was a big factor in helping pull the world out of a funk. Today, we have to consider the potential for a different kind of downturn because the global economy has handled a higher-rate environment better than many of us expected. Rather than wilting under the onslaught from central banks, some economies like the US even have analysts worried about the prospect of overheating.

Enter China. Locked away within the Covid Zero policy well after the rest of the world reopened, China is only beginning to re-emerge economically from the pandemic. Beyond the geopolitics at play, the question now is whether that reemergence is helpful or counterproductive.

If China adds to global growth as the full force of rate hikes slows demand (and inflation) elsewhere, the country might just help produce a Goldilocks outcome and save the world from recession as it did before. But if the global economy is strong enough to withstand rate hikes on its own — and inflation remains elevated, then China's extra contribution to demand might be the straw that breaks the inflation camel's back. This is the subject of today's Everything Risk column.

I am thinking about this in three parts: the global economy and how it is developing, given the existing fiscal and monetary policy mix, particularly in the US, the eurozone, Japan and the UK; how restrictive or loose the policy mix could get, based on inflation and economic growth; and whether China completely changes the economic mix now that it has reopened.

My Hong Kong-based colleague Sofia Horta e Costa says there's a big debate right now over all of this. She writes:

Let's break it down into three narratives:

Those who believe the post-Covid economy is already booming;

Those who expect more stimulus will be needed, and

Those who fear the ramifications of Xi Jinping's greater executive power or increasing anti-China sentiment in Washington.
You've picked your narrative, how do you play it? Hong Kong is home to the reopening trade and a good indicator of global investor positioning. If a US-based fund manager turns bullish on China's economy, she is going to buy what she knows (probably Alibaba.) A-shares are the stimulus play: this market is favored when it looks like China will need to boost consumption via more government spending or central bank liquidity, as was the case in February.

Frankly, I don't have a narrative for China since I'm on the other side of the world. But here's what I do know: its economy is already showing a pretty good rebound now that Covid restrictions have been removed. Last week's reading for the manufacturing purchasing managers' index was the highest since April 2012 and the non-manufacturing PMI was also robust, beating expectations.

That makes sense because that's what we saw after the departure from Covid elsewhere. It was a hockey-stick style upturn in the US, for example, before it moderated and saw GDP even contract a bit in early 2022. Moreover, some of that pent-up demand is sticky as people re-orient their thinking after the pandemic. Travel, leisure and hospitality sectors have benefitted from so-called revenge travel that hasn't let up even though our day-to-day has somewhat normalized.

To me, that speaks to a net lift to overall demand, so I buy into the first narrative that Sofia describes.

5.5%

- China's GDP target in 2022, which it missed after about 3% growth

If the global economy were derailed, it's more likely to be via high inflation than low consumer demand. That's exactly why some economists like Nouriel Roubini fear a hard landing. Plus, my own view is that 'no landing' in 2023 basically implies a hard landing in 2024 or later, because of inflation.

To be sure, Bloomberg Economics thinks the US jobless claims may overstate the strength of the labor market since the median time from an employee's getting notice to that worker going off payroll is about 60 days. And we see thousands more layoffs coming from the likes of Meta, Facebook's owner.

Still, take the UK for example, where inflation is over 10% and even core inflation excluding food, energy, alcohol and tobacco is nearly 6%. George Saravelos of Deutsche Bank writes:

Labour demand remains exceptionally strong showing few signs of a sustained cooling. Indeed, vacancies continue to only grudgingly soften and remain well above levels consistent with NAIRU. Recruitment difficulties remain elevated. Price momentum globally seems to be becoming more sticky — particularly in some core goods items, with services inflation showing increasing signs of stickiness on the way down. Wage data too remains largely inconsistent with the Bank's 2% mandate. And fiscal policy is just about to turn marginally more expansive,

And yet, people are talking about the end of rate hikes coming. That's emblematic of the conditions nearly everywhere: a tight labor market, sticky inflation, but central banks already easing off the brake ever so slightly. That's why I think the odds are tilted in favor of stronger inflation derailing growth than weak demand doing so. That's even more likely with a post-lockdown China coming into mix.

US banks are being forced to raise deposit interest rates.
Why are savings account interest rates so low anyway? We're talking an APY of 0.23%.
Goldman's Marcus is offering up 3.75% though. So there's that.
Investors thinking holding cash (over just stocks and bonds) will be a winning 2023 strategy.

Two big variables remain: the policy response from major G-7 central banks, and that from China.

We just got a good look at the latter (which is the reason I'm writing about China this week, too). The kickoff to the National People's Congress is marked by the announcement of this year's growth target, which came in at 5%. It underwhelmed markets. The figure also gave us great insight into how little policy stimulus China is looking to create. This lower stimulus target suggests the country is in the process of re-orienting away from export-, infrastructure, and property investment-led growth. That also means less of a pickup to global growth and inflation.

On the G-7 side, we've seen contractionary monetary and fiscal policy at the same time, but the tide is turning on monetary policy as central banks look to assess the impact. The Federal Reserve should be first to turn as it has long signaled a coming end to rate hikes. That leaves the Bank of England, the European Central Bank and the Bank of Japan to ease off the monetary brakes — probably in that very order since the BOJ hasn't even begun tightening.

So what does this all add up to? My base case has been for a US recession sometime in the back half of 2023. I am sticking by that, but only just. As my colleague Simon White likes to tell me, you can't really see a recession coming until it's right on top of you, like three months out. Think about the times before the pandemic when we had recessions: I remember economist Larry Kudlow going on TV in 2008, saying we weren't in a recession, even though it turned out we were in hindsight. So not only is it hard to predict in real time, it's also hard to even tell whether you're in it. The debt ceiling standoff certainly doesn't help

Regardless, stock markets tend to rise right until the bitter end. We came off the boil in 2022 because of the rate environment and are still much lower despite what seems to be a non-recession right now. The S&P 500 was more than 10% lower as the week began. And the Nasdaq 100 was down almost 20%, the definition of a bear market. So how asset markets act before the recession is anyone's guess.

My own view is that slowing earnings will keep a lid on upside potential for most risk assets — which I believe have already had unsustainable gains this year. Treasuries will be under pressure, too, since the Fed won't start cutting until we see both inflation coming down and the US economy softening considerably. China won't be a major upside factor in any of this, judging from its modest growth target. That's a good thing because Chinese growth adding to the already strong inflationary impulse globally could force even higher rates. That would certainly be the straw that breaks the camel's back.

As luck would have it, our MLIV Pulse survey this week focuses on China. Which do you consider as a greater risk for Chinese stocks, US actions against China or China's domestic policy? Do you think China will meet or beat its 5% GDP growth target? Share your views here.

"A 5% target is actually a more reasonable and healthier target, better for curbing systemic risks. Such a target not only gives the government more flexibility in its policies but also ensures room for structural industrial reform."

Shen Meng

Director for Chanson & Co

China-bashing is bipartisan in Washington.
Meanwhile top Chinese and American defense officials haven't spoken in three months.
And US firms are also more negative on China

Like getting The Everything Risk? Subscribe to Bloomberg.com for unlimited access to trusted, data-driven journalism and gain expert analysis from exclusive subscriber-only newsletters.

Like getting this newsletter? Subscribe to Bloomberg.com for unlimited access to trusted, data-driven journalism and subscriber-only insights.

Before it's here, it's on the Bloomberg Terminal. Find out more about how the Terminal delivers information and analysis that financial professionals can't find anywhere else. Learn more.