For the first time since Covid turned everything upside down, policymakers in the world’s two largest economies finally have a common cause.
Actions from US monetary officials last week and Beijing this week are aimed at delivering a simple message to global investors: we’re putting a floor under the economy.
The mainly-monetary measures rolled out by China earlier this week have been followed by a suite of fiscal pledges that, if carried out, would likely provide a more meaningful boost to activity later in the year.
And in starting its rate-cutting cycle with a jumbo 50 basis point reduction, the Federal Reserve is telling us that they’re concerned about the US job market and don’t want it to weaken any further.
TS Lombard’s chief economist Freya Beamish and chief China economist Rory Green wrote:
“At this stage, the reason why we are warming to China, despite the dire growth forecast, is the idea that the authorities might try to get ahead of the problem to some degree, just as the Fed is trying to stay ahead of the curve. So while last week, our main concern was the signal of a global slowdown, with the prospect of a Chinese recession, it has to be a bullish sign that policymakers at the two poles of the economy are taking the threat seriously.”
Investors famously worry about left-tail risk. It’s said that stocks tend to go up by a staircase and down by an elevator — a nod to the idea that a lot of the catalysts that cause material downside for equity prices happen quite quickly, and are seen as more negative than the little doses of positivity that more frequently accumulate over the years are viewed as good. Policymakers taking the threats to growth seriously means investors can sleep a little easier at night — if these actions are seen as substantive and sufficient.
So far, traders are believers. The CSI 300 Index (the stocks most likely to be directly supported by investment firms tied to the state) is up double digits in the past three days. But it’s far more than that: the rallies in copper (a commodity that’s very sensitive to sentiment surrounding Chinese growth) as well as a Goldman Sachs basket of US companies that have high sales exposure to China are telling us that investors think these measures will bear fruit.
And more importantly, look at Chinese 30-year government bond yields. They’d been on a seemingly inexorable march lower as growth and inflation outlook deteriorated and policymakers didn’t seem too concerned about reversing those trends. Yields are up 8.5 basis points today, their biggest one-day rise since 2020.
“While it’s fun to be cynical, it’s feels dangerous to fight what looks like a bit of a ‘whatever it takes’ moment out of China,” said Brent Donnelly, president of Spectra Markets, alluding to then-ECB President Mario Draghi’s 2021 pledge to do what was necessary to keep the European Union intact.
It may seem odd that keeping economic growth high isn’t typically at the top of policymakers’ lists, but officials in the US and China have had bigger fish to fry in the past year.
For the US, the economic story over the past couple years has been pretty cut and dried: monetary officials have been nearly singularly focused on keeping interest rates high to bring down inflationary pressures, while the impact of fiscal policies put in place had a long-lived impact in shoring up economic activity.
As for China, that’s a bit more complicated. After being the first country to reckon with the coronavirus, Chinese policymakers then turned to reining in imbalances in the property sector — at least, that’s the policy that had the largest macroeconomic impact. That’s been a substantial overhang on activity in China to this day.
The nation’s “zero Covid” policies in 2021-2022, in theory, put public health considerations front and center. (Although one could argue, and I certainly would, that the extreme resistance towards accepting Western vaccines severely undermines the case that the authorities were doing all they could to keep the population as safe as possible.)
And that was also part and parcel of an overarching strategy to curb the power of institutions or sectors seen as not always acting in the best interest of the state, like internet platform companies or for-profit education.
2023 was something of a transitional year in which Beijing largely let the economy stand on its own two feet, without being shackled by mobility restraints but without much in the way of a stimulative sugar rush.
And now, here we are: in a place where things have gotten either outright bad enough, or concerning enough, that policymakers in both economies are drawing lines in the sand.
