The People’s Republic of China and the world market are on all in cue that the said country will be in recession in the near future due to recently reported debauched credit standing and flat profit growth.
China on loan frown
China’s largest banks report that there is a large stock of rapidly lethal loans and China’s ability to absorb the potential losses from them is drastically decreasing. The Non-Performing Loan (NPL) provisions being put aside to deal with these loans cannot keep up with the rate of bad loans.
China’s banking regulators have attempted to assist the banks by lowering NPL provision coverage requirements from 200% to 150%; however this has not proved successful. Bank of China, Bank of Communications, and Industrial and Commercial Bank of China have already pushed the limit by 149%, 151%, and 141%.
The bank with the highest NPL remains to be Agricultural Bank of China, with an NPL of 180%; this fell from 367% in 2013.
If the current trends continue to increase by doubling to 4% or 5%, this could then start consuming the banks own retained earnings.
Flat Profit Sack for China
China’s growth has dried up. Currently, pre-provision operating profits for the first quarter were at 4%, and this is down from the last quarter in 2015 where they were at 8%.
When three major banks reported their 2015 results for the month of March, they revealed that they had written off a total of $21.85 billion in debts which is 1.4 times more than they did in 2014. This shows the level their customers (mainly industrial companies) have struggled with debt repayments.
The same report also shows that profits were barely flat compared with growth rates of 40% a few years ago –
- Industrial and Commercial Bank of China reported 0.5% profit growth
- China Construction Bank Corp reported only a 0.1% rise in profit
- Bank of China reported a 0.7% increase in profit
Eyeing the long term implication
The Chinese government’s failure to come up with a viable plan for economic recovery has seen to be one of the factors that led to the falling confidence of the country’s future economy.
The reduction in profits growth could force many Chinese banks to start investing in trust and wealth-management products. This could be a risky move as high yield assets, such as these, could affect liquidity if banks need to offload them.
Thus, the best outcome for China, should they decide to carry on this course, would be for them to remain in a state of long-term recession.
China for Now
The markets value the banks’ Hong Kong shares at 60-70% of book share. Nonetheless, there is hope that the economy may be showing signs of stabilizing. Although growth is slow, there were reports of 6.7% growth in the first quarter of 2016.
China’s leaders are moving away from growth based on investments and export manufacturing and more towards growth based on sustainable services and private consumption. There is hope that this will raise chances of stability.
The latest figures are in line with many economists’ predictions, and there is hope that China will reach their official full-year target of 6.5-7% growth.
China on possibility of Recession
Experts predicted back in 2015 that unless China changes its strategy, it is heading for a long-term decline or collapse. This would see China’s rank returning to that of a weaker state.
Although, if the recent reports of a possible stabilization of the economy are correct then is there still a chance that China may be able to avoid a complete recession?
Most economists see the recent improvements as a positive. However, they still believe that a recession or at least long-term stagnation is still the most likely outcome.
Despite signs of growth, there is still the ever increasing debt. The country, so far, has resorted to bailing out bad debt with even more bad debt. The current level of debt is unsustainable and is affecting further economic growth.
Unless China can shrink its deficit, then the rate of current growth is unlikely to prevent a recession.
Should China’s economy concern us?
China’s economy is ranked the second highest in the world, the first being the US. These rankings do not indicate the overall wealth of the country.
China has connections with the US through exports; they are our third largest export partner. Exports from China make up 5.3% of total exports into the country. Similarly, China is also our biggest import partner, accounting for 16.4% of our total imports.
This alone shows the imbalance of power between China and us. Any positive or negative activity in China is going to have an impact on the US. The slowdown of the Chinese economy is already causing concern, as this has negative impacts on markets which are closely linked to China, such as the US.
Trump Says Economy ‘Roaring Back’ in June As 4.8 Million Jobs Added
The economy added back 4.8 million jobs last month, according to the government’s June jobs report released yesterday. That handily beat the 3.7 million jobs forecasted by economists and dropped the unemployment rate down to 11.1%.
After the report was released, President Trump said the economy was “extremely strong” and “roaring back” after the country has regained more than 7.5 million jobs in the last two months. Trump added that the economy will keep growing unless voters elected Democrat Joe Biden in November. He said Biden would raise taxes and hurt the economy and the stock market would “drop down to nothing.”
Of the jobs added back in June, bars and restaurants hired – or rehired – 1.48 million workers. This comes as many reopened for outdoor dining in the early phases of the reopening. They brought back a similar number of workers in May. It happened after shedding more than 6 million jobs due to the pandemic.
The retail sector regained 740,000 jobs, healthcare added back 358,000 workers, and manufacturing saw 356,000 jobs added.
The energy sector continues to be battered by low oil prices amidst the economic slowdown. Additionally, that industry shed an additional 10,000 jobs last month.
The return of lower-paying jobs like those found in the restaurant and hospitality industry dragged down the average hourly wages for the second straight month.
Many are cautioning against reading too much into reports like average hourly wages while the economy is in such turmoil.
Stephen Stanley, chief economist of Amherst Pierpont Securities, says, “The wage figures will be pretty much useless for a long while until the labor market gets back to some semblance of normality.”
Andrew Chamberlain, chief economist of the job site Glassdoor, also gave an explanation. He added, “Today’s positive jobs report does provide a powerful signal of how swiftly U.S. job growth can bounce back and how rapidly businesses can reopen once the nation finally brings the coronavirus under control — a reason for optimism in coming months.”
Unfortunately for many of the workers recently rehired to work in bars and restaurants, the recent spike in new coronavirus cases could lead to those jobs quickly being lost for a second time. Bars in many states are being shut down again in an effort to curb the growing number of cases.
The unemployment rate fell for the second straight month. However, the Bureau of Labor Statistics is trying to fix a reporting error that, if corrected, would increase the unemployment rate by 1%.
The problem is how households respond to the monthly survey that is used to calculate the unemployment rate. The jobless rate would have been 1 point higher if not for continued problems in how respondents answer the question about their employment status.
What many consider the “real” unemployment rate, which is the U6 rate, includes workers who can only find part-time jobs. It also includes those who’ve become too discouraged to look for jobs because so few are available. Using that measurement, the unemployment rate stands at 18% in June, down from 21.2% in May.
Trump Favors Larger Stimulus Checks, Says ‘Tremendous’ Market Crash if Biden Wins
In a wide-ranging interview with Fox Business News, President Trump mentioned his support for another round of stimulus checks and says should Joe Biden win the election in November, we should expect the stock market to crash “a tremendous amount.”
On Stimulus Checks
Speaking with Blake Burman, the president says he is in favor of another round of stimulus checks, but wants to make sure that there is a financial incentive for Americans to return to work.
“I support it, but it has to be done properly. I support actually larger numbers than the Democrats, but it’s got to be done properly. We had something where it gave you a disincentive to work last time. And it was still money going to people, and helping people, so I was all for that. But we want to create a very great incentive to work.”
Trump also mentioned he wants the checks to arrive quickly and spent quickly, without the Democrats adding complications.
“I want the money getting to people to be larger so they can spend it, I want the money to get there quickly and in a non-complicated fashion. And they wanted to make it too complicated, also it was an incentive not to go to work,” said Trump.
Returning to work is what hard-working Americans are looking forward to, says Trump, and he wants there to be a financial incentive to do so.
“You’d make more money if you don’t go to work. That’s not what the country is all about. And people didn’t want that. They wanted to go to work but it didn’t make sense because they make more money if they didn’t… we want people to get out and we want to create a tremendous incentive for people to want to go back to work.”
On Biden and Taxes
When asked about Joe Biden’s recently announced plans to raise corporate taxes if he becomes President, Trump said “You’re going to crash the market. 401(k)s will be down the tubes, the wealth of the country will be down.”
He added “That will kill the market. It will kill everything we are doing, it will kill jobs, and it will be very bad. Frankly, the stock market is doing well, but it’s an overhang. If he got elected, and they say this, that’s an overhang over the market, because the market would crash. Would absolutely crash.”
When asked what he means by crash, Trump responded, “Markets would go down by tremendous amounts. He’d raise taxes, he’d raise regulations. Look, one of the biggest things I’ve done is I’ve cut regulations more than any President in history. We still have regulations, but they’re much less. His people, the people around him (Biden) are radical left. They’re going to raise taxes, they’re going to raise regulations, and they’re going to put everyone out of business. It would be a disaster.”
Fed to Keep Rates At Zero, Worried About Market Crash Later This Year
The Federal Reserve will keep rates at near zero percent for the foreseeable future. Also, a few members feel worried about a second wave of the coronavirus crashing the markets later this year. These are according to the minutes of the June 9-10 meeting.
Federal Open Market Committee members voted to keep the benchmark short-term borrowing rate in a range of 0%-0.25%. They also said that, until the economy “had weathered recent events,” they would keep it there. Without providing specifics, the notes also mention that “a number” of members believe there is a high probability of additional “waves of outbreaks” of the coronavirus.
This worry over additional outbreak waves and the economic damage it could bring led the FOMC committee to downgrade their economic outlook from the April meeting. The said meeting had predicted a more benign baseline forecast.
The members also indicated that they will begin providing the markets with stronger guidance about future interest rate moves. However, Fed watchers don’t expect the committee to begin providing this guidance any earlier than the September meeting.
“In particular, most participants commented that the Committee should communicate a more explicit form of forward guidance for the path of the federal funds rate and provide more clarity regarding purchases of Treasury securities and agency [mortgage-backed securities] as more information about the trajectory of the economy becomes available,” the minutes said.
Milestones and Metrics
The committee also discussed what milestones they will use to determine an appropriate time to start raising interest rates. When they did, the metrics proposed has split the committee.
In 2012 for example, the Fed said it would keep rates at zero until the unemployment rate fell below 6.5%. Alternatively, they also said it would keep zero rates until the inflation goes above 2.5%.
In June’s meeting, a “number” of members said any interest rate increases should be tied to the Fed’s 2% inflation target. Meanwhile, a “couple” favored using the unemployment rate. A “few” members suggested the committee set a specific date.
The FOMC also released its expectations for GDP over the next few years. The median GDP projection for 2020 was a contraction of 6.5%. A 5% increase in 2021 and a 3.5% in 2022 will follow this. However, they acknowledged “that there remained an extraordinary amount of uncertainty and considerable risks to the economic outlook.”
Trump on Powell
Meanwhile, there’s a bit of good news for Federal Reserve chairman Jay Powell. It appears he has slowly won over his most vocal critic, President Trump.
During an interview on Fox Business News, Trump said Powell has “stepped up to the plate” and he’s happy with Powell and Treasury Secretary Steve Mnuchin for the work they’ve done to help the economy recover.
“I would say that I was not happy with him at the beginning, and I’m getting more and more happy with him, I think he’s stepped up to the plate. He’s done a good job, he’s had to liquify a little bit, let us liquify, put out the money that you needed, and I would say over the last period of 6 months he’s really stepped up to the plate.
“I can tell you I’m very happy with his performance, and Steve Mnuchin, I think they’ve both done a very good job, they’re working together very closely.”
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