Fasten Your Seatbelts: Big Shots Warn of Economic Risks in China【Qin Peng Observation】

Hello viewers, welcome to “Qin Peng Observation”.

Today’s focus: Fed rate cut, what impact on the stock market, forex, and gold? What will happen in China?

Bridgewater Associates founder Dalio and JPMorgan Chase CEO Dimon have recently issued warnings about the Chinese economy. The Straits Times has also warned of potential risks in China, urging the world to be cautious.

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On Wednesday, Fed cut rates as scheduled, surprising the stock market. Market expectations were for a 25 basis point cut, but the actual cut was 50 basis points. This raised concerns that the Fed may have seen danger signals others haven’t, indicating greater risks to the U.S. economy.

However, on Thursday, the major U.S. stock indices rebounded significantly, with the market digesting the Fed’s move. The good news is that the likelihood of a soft landing for the U.S. economy has significantly increased. The Nasdaq led gains, and both the Dow and S&P 500 reached record levels. International stock markets also followed the upward trend.

The Fed’s rate cut is mainly due to signs of economic slowdown in the U.S., especially in employment. The average monthly job growth over the past three months was 116,000, significantly lower than earlier this year. Meanwhile, the unemployment rate rose to 4.2%.

However, the latest data on Thursday showed that the number of Americans filing for unemployment benefits last week was the lowest in any week since May and below expectations.

This has also added a political dimension to the Fed’s rate cut, as it has not cut rates close to an election since 1992. Democratic candidate Harris and Republican candidate Trump engaged in a virtual information war.

Harris praised the move in a statement on Wednesday, stating, “While this news is good for Americans facing high prices, my focus is on continuing the work to lower prices in the future.”

Trump, on the other hand, said, “I think if they’re not just playing politics, then the fact that they’re reducing by a significant amount indicates things are really bad economically.” “It’s a big cut.”

As for the implications of this rate cut for the global economy, the U.S. economy, and China, what impact will it have on the stock market, forex, and gold?

Let’s start with the stock market. The Fed’s rate cut means more funds will flow from banks into the securities market, which is positive for stocks. Lower rates will also reduce borrowing costs for some companies, helping mitigate risks and stimulate growth. This is the main reason why bank stocks rose on Thursday, as banks represent the fundamentals of the economy.

However, I caution friends investing in the stock market to be aware of risks: First, the U.S. stock market will continue to fluctuate before the November election, as the market has differing views on a victory for either Harris or Trump. Second, geopolitics cannot be ignored. In fact, most economic experts believe the U.S. will enter a recession in 2023, due not only to the normalization of supply chains and employment after the pandemic but also largely due to the stimulation of the military-industrial complex by the Ukraine and Middle East conflicts, along with sudden AI advancements. Furthermore, high inflation has forced the Biden administration to abandon its previous aggressive energy policies, opening up federal land for oil drilling and boosting job growth. However, uncertainty prevails in the world, and geopolitics is a double-edged sword that can stimulate the military-industrial complex but also disrupt supply chains, affecting the stock market.

Additionally, the aggressive rate hikes and high interest rates over the past two years have harmed the real economy, especially small and medium-sized enterprises. The current rate is still high at 7%, and a small decrease may not significantly improve their situation in the short term. JPMorgan Chase CEO Dimon also stated this week that whether the Fed cuts by 25 or 50 basis points, it will not have a seismic impact; the key lies in the economic fundamentals, namely the real economy itself.

So, friends investing in the stock market should continue to monitor the pace and extent of the Fed rate cuts and also watch for any potential rebounds in the Consumer Price Index (CPI).

Moving on to forex. It is widely believed that the Fed’s rate cut will weaken the dollar, making other major currencies stronger, such as the Chinese yuan, Japanese yen, and British pound, all of which have appreciated. However, this is a double-edged sword. On one hand, more funds may flow out of the U.S., stimulating other countries’ stock markets or investments. On the other hand, as the U.S. is the world’s largest single consumption market, the appreciation of other countries’ currencies will increase export pressure, which is detrimental to economic growth.

Moreover, there are many factors influencing currency trends. For example, ongoing investments in foreign assets by Japanese households have led to the selling of the yen, which will ultimately limit the yen’s appreciation. As for the Chinese yuan, being a managed currency by the government and with wealthy individuals continuing to move money out of China, one should not expect a significant appreciation. Some analysts predict the yuan will enter the 6 range, but this seems overly optimistic. The Chinese government will intervene to stimulate exports.

How will the Fed rate cut affect gold prices? Not much. Gold prices have risen over the past year mainly due to purchases by various governments, especially with the sharp increase in gold purchases by the Chinese central bank. However, up until early last month, there have been no gold purchases by the Chinese central bank for three consecutive months. The fact that gold prices remain near $2600 per ounce is due to continued purchases by other central banks. Whether this trend can be sustained is worth monitoring.

Will the rate cut be a major boost for the housing market? Not quite. In fact, over the past few months, as the market expected the Fed to cut rates, mortgage rates in the U.S. have already declined. However, due to soaring home prices over the past four years, nearing historic highs and limited supply on the seller’s side, U.S. home sales in August have continued to decline, with existing home sales dropping 2.5% from the previous quarter. Seasonally adjusted annual rate is at 3.86 million units, the fifth consecutive sales decline in the past six months.

Therefore, although mortgage rates are at new lows over the past year, many buyers are waiting for further price drops due to the high prices.

How will the Fed rate cut affect China? In the past two years, China’s monetary policy has been contrary to the world’s, as most countries face inflation while China is facing a dreadful deflation. This has created significant pressure on capital outflows within China.

With the Fed now cutting rates, Chinese state media CCTV cited experts saying that in the future, the interest rate differential between the U.S. and China will narrow, creating a better external environment for China to implement accommodative monetary policies. The People’s Bank of China also stated last Friday that they will “strengthen control measures” and “introduce some incremental policy measures to further reduce corporate financing and household credit costs”.

Experts also believe that the return on yuan-denominated assets will gradually increase, attracting more international capital to allocate to yuan-denominated assets. More cross-border capital will gradually flow into China. Some even predict hundreds of billions of dollars to flow into China, which would be a significant boost to the Chinese stock market and assets.

However, I am wary of this prediction. The People’s Bank of China already has limited room for rate cuts, as I mentioned earlier. International capital is also cautious and may not flow as heavily into China. People’s most common investment mentality is to buy low and sell high; investments are often based on expectations of future appreciation rather than just low prices. Otherwise, why did the Shanghai Composite Index fall below 2700 points on Wednesday, the first trading day after China’s Mid-Autumn Festival?

Moreover, recently, prominent figures on Wall Street have issued warnings about the Chinese economy.

First, Bridgewater Fund founder Dalio spoke about his views on investing in China during an interview on Bloomberg TV on September 18. His main points were:

1. Shrinking household wealth: Over the past four years, China’s real estate and stock markets have declined, leading to a significant loss of wealth for the vast majority of residents, especially the middle class, who are increasingly turning to holding cash as a relatively safe asset during a period of monetary contraction.

2. Trap of land finance: With the real estate market downturn, traditional land finance mechanisms are difficult to sustain, leading to financial shortages for local governments. Without structural reforms, it is difficult to move beyond debt issues.

3. Property ownership: Individual property rights, a sacred and inviolable aspect, are being questioned in China, affecting investor confidence. Recent cases like cross-regional law enforcement and significant increases in non-tax revenues are becoming more common.

4. Decline in the entrepreneurial environment: The entrepreneurial atmosphere is deteriorating with concerns about deteriorating conditions for starting a business and policy uncertainties becoming obstacles to entrepreneurs due to the eroding prestige associated with the Deng Xiaoping era of entrepreneurial successes.

5. Technological innovation: Dalio emphasized China’s advantages in technological innovation but questions whether the current environment focusing on government directives can sustain the soil for corporate innovation and vitality in the long term.

6. Future investments in China: Dalio said he will continue to invest in China but is reducing the proportion of his investments, cautioning against China becoming a dominant part of an investment portfolio. He also believes China is facing a more severe economic challenge than Japan in the 1990s and looks forward to China’s economy emerging from a structural reform process.

Additionally, Wall Street’s top executive, JPMorgan Chase CEO Dimon, also warned of risks in China on Tuesday. As mentioned earlier, Dimon said the Fed rate cut is a minor issue, so what’s a major concern for him?

Dimon stated that geopolitical issues—including conflicts in Ukraine and the Middle East, as well as U.S.-China relations—are his top concerns. “These are all a much bigger deal than anything I’ve encountered in my career.”

Notably, this is not Dimon’s first time expressing these views. In April this year, he had a similar perspective in an interview with The Wall Street Journal. He believes that the U.S. is in a very advantageous position during confrontations between the U.S. and China.

However, Dimon did not provide a detailed analysis of how far the U.S.-China conflict may escalate.

On Thursday, Yang Danxu, China News Director at the Singapore Straits Times and Beijing correspondent, was more direct. In an article titled “Facing the Third Wave of Chinese Impact,” she first mentioned various signs and data pointing to the economic malaise in China, citing a lecture given this week by Singapore’s ambassador-at-large, Chan Heng Chee, a longtime observer of international geopolitics, who noted that after the end of the Cold War, the world faced two waves of “Chinese impact”: the first wave following China’s rapid rise after joining the WTO, becoming the world’s second-largest economy, and the second wave being the intense competition between China and the U.S. after China’s rise, encompassing trade, technology, military, values, soft power, and the ongoing struggle for dominance in the world order. Now, the world is facing the third wave of “Chinese impact”: China’s sudden slowdown.

With China’s economic deceleration, not only will there be a direct impact on the economy, Yang Danxu cited an alert from New York Times columnist Stephen, warning that an economic recession could also prompt the CCP to take risks, such as on the Taiwan issue. She cautioned, “In the face of the turbulence brought by this wave of impact, both within China and abroad, people need to fasten their seat belts.”

How should one fasten their seat belts? In recent days, following incidents like the September 18 attack on a 10-year-old Japanese boy in Shenzhen who tragically passed away and the continued suppression by the Chinese government, with many Chinese paying their respects but also some netizens taking pleasure in the misfortune; the alleged kidnapping and death of the head of construction owed money by the director of the Hunan Provincial Treasury on September 19; and the recent news of 5 veterans wiping out the family of 11 of Wang Hongbing, the deputy mayor of Xianyang, with increasing cases of civilians killing officials, we are still witnessing more and larger displays of such cases.

Furthermore, since May of this year, many countries have halted flights coming from China.

All these incidents point to one fact: China has become a hotspot of incidents and a powder keg. As such, what do people think about the future direction of the Chinese economy? How many more incidents will occur in society? What will happen in the Central Government?

Thus, I also advise everyone to “fasten their seat belts.”

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