The Federal Reserve's postponement of interest rate cuts is considered a positive for the United States, but for global countries, including China, it is not necessarily good news. It could even be described as a "black swan" event that affects the economic policies of various nations.
How does the Federal Reserve's black swan affect China's economy?
On February 4th, a community bank in New York, USA, suddenly collapsed due to a real estate crisis, with its stock price falling by half within two trading days, even impacting the stability of the US banking industry. The financial crisis is gradually approaching.
Subsequently, the non-farm report showed that the US economy went from a hard landing to a "no landing" scenario. The better-than-expected economic data weakened the Federal Reserve's expectation to cut interest rates, thereby delaying the time for major global economies to be nourished by the "flood" of dollars.
So, facing this series of issues, what kind of impact will China encounter? How should we face the challenges?
Black swan outbreak? The Federal Reserve influences the world again?
After the January non-farm data was released, the US stock market began to suddenly decline. The unexpectedly strong employment numbers led to a cooling of expectations for the Federal Reserve to cut interest rates. The interest rate cut expected in March is likely to be postponed to May, and even the expectation for a cut in May is not a sure thing.
The January non-farm data exceeded expectations.
For the United States, this may be a sign of economic recovery, or even a soft landing for the economy. However, for the global economy, it is not necessarily a good thing. Therefore, it can be considered a clear "black swan" event!
Why do we say that?
The reason is that the postponement of interest rate cuts by the Federal Reserve can lead to a delay in the global economic recovery process. This is because lower interest rates typically stimulate economic growth by making borrowing cheaper, which can encourage investment and spending. When the Federal Reserve delays cutting rates, it may slow down this stimulative effect, affecting the pace of global economic recovery.
For China, this could mean a slower recovery in exports and foreign investment, as the global economy's growth is a key driver for China's own economic performance. Additionally, a stronger dollar resulting from the Fed's hawkish stance can make Chinese exports more expensive on the international market, potentially reducing their competitiveness.
Moreover, the uncertainty created by the Federal Reserve's actions can lead to market volatility, which can affect investor confidence and capital flows into and out of China. This can have ripple effects on the Chinese economy, impacting everything from stock markets to currency values.
In response to these challenges, China may need to implement its own economic policies to counteract the effects of a delayed global recovery. This could include fiscal stimulus measures, such as increased government spending on infrastructure projects, or monetary policies, like lowering domestic interest rates or providing liquidity to the banking system to encourage lending.
Furthermore, China could focus on strengthening its domestic economy to become more resilient to external shocks. This might involve promoting domestic consumption, encouraging innovation and high-tech industries, and improving the business environment to attract both domestic and foreign investment.
In summary, while the Federal Reserve's decision to delay interest rate cuts may be beneficial for the US economy, it presents challenges for China and the global economy. China will need to be proactive in its economic policies to mitigate the potential negative impacts and continue on a path of sustainable growth.Firstly, the Federal Reserve's interest rate hikes are essentially a way of harvesting wealth from countries around the world, particularly developing nations. The essence of these hikes is to draw liquidity from these countries, causing dollars to flow back to the United States, which leads to market shortages and economic recessions, ultimately serving as a monetary policy to suppress inflation.
After the Federal Reserve raises interest rates, global capital flows back to the United States. Conversely, lowering interest rates is a monetary policy used by the Federal Reserve to ease monetary conditions and stimulate economic growth, typically employed during recessionary periods or when the U.S. economy is not performing well. A portion of the funds released by the United States is absorbed by the domestic market, while another part is transferred abroad through financial markets in search of investment opportunities, thereby indirectly promoting the economies of various countries around the world.
Now, the postponement of the interest rate cut means that the anticipated timing for the United States to ease monetary policy, which is eagerly awaited by countries worldwide, has been delayed by several months. Consequently, the time when these countries will receive the benefits is also delayed by several months. This implies that the exchange rates of various countries will continue to maintain a lower level, like the Chinese yuan, experiencing continuous depreciation.
The market estimates that the Federal Reserve's interest rate cut has been postponed to May.
Therefore, the unexpected event (black swan) from the Federal Reserve has impacted the global economic recovery. So, how will the Chinese economy be affected by this?
After the black swan event, what are the impacts on China?
Firstly, the Federal Reserve's interest rate cut is beneficial for China's foreign trade exports, the stability of the yuan exchange rate, the recovery of external demand, foreign trade orders, and the inflow of international capital. We cannot say that the Federal Reserve is releasing positive news, but we can say that it is "atoning" for its previous rate hikes. Let's expand on this point.
Firstly, the impact on China's foreign trade exports.
China's foreign trade in 2023 was affected by the Federal Reserve's interest rate hikes throughout the year. Customs data show that the total value of goods trade imports and exports in 2023 was 41.76 trillion, a year-on-year increase of 0.2%.Customs Data for 2023: Merchandise Trade Imports and Exports Reach 41.76 Trillion, Growing by 0.2%
Although there was no recession, the 0.2% growth is negligible compared to the past and has a minimal impact on China's economy. However, it did not hinder progress.
The reason for this data is still the negative impact of interest rate hikes on the global economy, leading to a continuous decrease in demand for Chinese goods from European and American countries. This, in turn, affects domestic employment, corporate profits, and people's livelihoods.
Originally, if the Federal Reserve could not withstand the pressure of interest rate hikes, a recession in the U.S. economy would force the Federal Reserve to lower interest rates faster, thereby allowing China's foreign trade to recover more quickly. But who knew that the U.S. adopted a method of borrowing to support the economy. Even with more than $34 trillion in U.S. debt, it still needs to continuously issue debt to stimulate consumption and the service industry.
Therefore, the black swan of the Federal Reserve has affected and delayed the pace of global interest rate cuts, which is also bad news for the recovery of China's foreign trade.
Secondly, delaying interest rate cuts affects the stability of the RMB exchange rate.
In the foreign exchange market, the RMB is generally settled with the U.S. dollar to determine our own exchange rate, which is a rule under the dollar hegemony.
After the Federal Reserve delayed interest rate cuts, the depreciation rate of the U.S. dollar would slow down, leading to an appreciation of the U.S. dollar; and the appreciation of the U.S. dollar means the depreciation of the RMB. Therefore, we saw that after the non-farm data was announced, last Friday's trading day, the RMB exchange rate depreciated by 0.4%, from around 7.19 to around 7.21, getting closer to the dangerous threshold of 7.3.
The RMB exchange rate has depreciated again recently.
From this, we can judge that the Federal Reserve's delay in raising interest rates is unfavorable for the RMB, and the stability of the RMB exchange rate is an important step in China's financial stability, affecting the central bank's space for interest rate cuts and reserve requirement ratio cuts (interest rate cuts would lead to exchange rate depreciation). So this is also a bearish factor for China's economy.Thirdly, it is not conducive to China's utilization of foreign capital and the resumption of production. Over the past few years, due to the interference of the Federal Reserve's interest rate hikes, many foreign companies have slowed down their investments in the Chinese market. On one hand, due to geopolitical factors and supply chain issues, investing in China is not very convenient. On the other hand, after the Federal Reserve raised interest rates, global capital has flowed back to the United States, as the interest rates in the U.S. are higher after all.
Ultimately, the Federal Reserve's interest rate hikes have led to an inversion of the interest rate differential between China and the U.S. The U.S. federal funds rate, which was originally lower than China's interest rate level at less than 0.5%, has continuously risen to the current range of 5.25%-5.5%. Foreign capital would consider that it is better to buy bank financial products in the U.S. rather than invest in China, as the interest rates are so high. Moreover, there is no risk involved.
High interest rates have led to Wall Street attracting global capital backflow. Therefore, it is not just China that has been affected by this investment logic; countries around the world have been impacted as well, with capital fleeing from various nations and pouring into the U.S. market and U.S. banks en masse. This has resulted in a reduction of funds that should have entered China, leading to an outflow of foreign capital, which is detrimental to China's utilization of foreign investment and, consequently, unfavorable for the recovery of China's economy.
How should China respond to challenges after the outbreak of a black swan event? It is clear that China cannot directly interfere with the Federal Reserve's monetary policy, demanding that Powell lower interest rates sooner to give global developing countries a chance to catch their breath and develop.
However, as one of the world's leading powers with a solid foundation, we can also adopt similar measures to stimulate the economy, stabilize the internal cycle, and stabilize China's economic "foundation." In terms of monetary policy, this year the central bank will lower the reserve requirement ratio by 0.5%, releasing 1 trillion yuan in long-term funds to replenish market liquidity. This is a typical way in economics to use monetary policy to stimulate and support the economy, which also inspires confidence in China's economic recovery, and this point is very important.Today, the central bank officially lowered the reserve requirement ratio by 0.5%, releasing long-term funds of 1 trillion yuan!
In terms of fiscal policy, the Ministry of Finance incurs debt to create various demands, and through various means, implements projects on state-owned enterprises and some private enterprises. This is beneficial for these companies and enterprises to obtain projects, recruit production, and ultimately obtain profits, as well as expand reproduction. In this process, it can digest and absorb the labor force in society, solving employment problems. This is a relatively simple example of stimulating the Chinese economy using fiscal means.
Therefore, we can see that whether it is monetary policy, fiscal policy, or various administrative orders issued jointly by multiple departments, they are all "weapons" to stimulate the economy and deal with the black swan of the Federal Reserve.
So I believe that although 2024 is the "recession period" mentioned by the Merrill Lynch clock, and the IMF is also pessimistic about the economic prospects for 2024, coupled with the black swan of the Federal Reserve, this year will not be easy.
The Chinese economy will get better and better!
But I also believe that the current difficulties have been seen through by the top level, and they will also introduce more benefits to support the bottom of the Chinese economy, thus helping the Chinese economy to resist the black swan of the Federal Reserve and get on the fast track to recovery!