Over the last few months, interesting developments have taken place within the world’s two biggest economic powers – by GDP. Their investments started to decline while the inflation rate started to rise. This presents a potential problem finding financially safe positions within the countries. Let’s look at these developments in detail.
China’s position
Over the past few years, China has faced many economic challenges, but a recent crisis could adversely affect the whole economy of the country. This crisis is the housing market. Considering that it accounts for 30% of the country’s economy, its effects can be enormous. Due to the decline in the housing market, China’s largest banks are offering lower rates on long-term deposits. A lack of good quality loan opportunities indicates that global economic growth is in decline. In response, the nation’s top lenders started setting their interest rates for 3 year deposits 40% higher than those for 5 year deposits, which caused many smaller lenders to follow their lead. Chinese treasury markets show an inverted yield curve, which indicates a high recession risk.
Savers’ poor long-term outlooks led to a surge in bank deposits, which led to the country’s officials creating an economic downturn as they raced each other to find safe havens for their assets. In the following 3 months, the country barely escaped a contraction – expanding only 0.4% – but collected data indicates that household deposits grew by 0.33% while bank borrowings plummeted by over 50%. Compared to other options, deposits are considered safer. In the first half of 2022, these factors – which are supposed to balance each other out – caused the property market turmoil which resulted in long-term real estate loans falling by 25% and many companies defaulting on their loans. It presents a new challenge for lenders to find a way to lend money without incurring bad debts in this situation. An inversion of the yield curve indicates that the economy is slowing down.
Situation within the United States
Despite the fact that this seems like a reasonable idea, the strategy used makes it somewhat uncertain. The Federal Reserve in the United States intends to take further major steps to curb the – already extremely high – inflation. As of time of writing, they just hit a new high in CPG – Consumer Price Growth – resulting in their commitment to raise the benchmark by another 0.75% – their second time in two months – resulting in a federal funds rate of 2.5%.
Interest rates will follow from July – similar to the ones in China – but, unlike their Chinese counterparts, the Federal Government is uncertain of what direction to take due to the emergence of consumer distress and forecasts of the worst parts of the inflation shocks already passing. When interest rates reach such high levels, they cease to stimulate growth and are viewed by the Central Bank as an urgently needed intervention to cool down the economy and ensure future inflation rates. They also need this to repair their reputation following their slow reaction at the start of the inflation crisis.
Even though the inflation rate reached new heights, housing and business activity cooled across the country as companies announced layoffs. If this spirals out of control another recession could hit the country resulting in a 1.5% increase in unemployment – potentially creating a total unemployment rate of 5% within the country – forcing policymakers to meet again in September to discuss the next steps. Towards the end of the year, the Federal Funds Rate is expected to surpass 3.5%.
A possible alternative
The economic conditions in both countries are expected to decline further, leaving us with the question: how can we protect our investments? Based on our extensive
research, we concluded that commodity credit lines with secure collateral offered by reputable companies would be the best haven for investment given the uncertainty
of the situation in both countries, the war, and other international factors putting pressure on these economies.
Conclusion
It is possible that both the United States and Asia could experience a recession in the near future. This could have a negative impact on countries directly dependent
on them. However, by investing in secure investments, many more Countries that have a strong economy and are economically stable will be able to weather the
storm. These countries will be able to maintain their stability. In Europe, they are close enough to be able to use each other as a crutch in case one of them is
struggling, making them a good investment place.
References
- HART L., SHOEMAKER E. (2022): “The Rise of Alternative Financing in Commodities” lhttps://www.hcgroup.global/hc-insider/hc-insider-podcast/the-rise-of-alternative-fin
ancing-in-commodities - The Financial Times (2022): “ Fed to implement second 0.75 point rate rise amid uncertainty over next step” l https://www.ft.com/stream/e5533208-e5cc-4be5-aea1-c464a9a205e3
- The Financial Times (2022): “ The Fed must avoid Volcker’s mistake on inflation” l https://www.ft.com/stream/e5533208-e5cc-4be5-aea1-c464a9a205e3
- The Financial Times (2022): “ The inflation fight was always going to be ugly” l https://www.ft.com/stream/e5533208-e5cc-4be5-aea1-c464a9a205e3
- The Financial Times (2022): “ Inverted yield curve in China savings rates signals sustained economic slowdown” l https://www.ft.com/chinese-economy
- The Financial Times (2022): “China exports fall as demand slows and lockdowns hit manufacturing” l https://www.ft.com/chinese-economy
- The Financial Times (2022): “China’s biggest four banks feel property pinch from failing loans” l https://www.ft.com/chinese-economy
- The Financial Times (2022): “China’s zero-Covid policy is self-defeating” l https://www.ft.com/chinese-economy
- Bloomberg (2022): “China Consumer Inflation Reaches 2-Year High as Pork Surges” l https://www.bloomberg.com/news/articles/2022-08-10/china-s-consumer-prices-ju
mp-adding-to-inflation-concerns - TEPPER T. (2022): “Why Is Inflation So High?” l https://www.forbes.com/advisor/investing/why-is-inflation-rising-right-now/
- WAKABAYASHI D.(2022): “As China’s Economy Stumbles, Homeowners Boycott Mortgage Payments” l https://www.nytimes.com/2022/08/17/business/china-economy-real-estate-crisis.html
- OU Z. (2022): “China property crisis: why the housing market is collapsing – and the risks to the wider economy” l https://theconversation.com/china-property-crisis-why-the-housing-market-is-collapsing-and-the-risks-to-the-wider-economy-189082
