Peter Bednarek’s Post

Key Takeaways Introduction The recent sell-off of US Treasury and agency bonds by China is likely to add new dimensions to the trade tensions between the two economic giants. This strategic financial maneuver highlights the ongoing trade war and underscores the powerful financial weapons wielded by both nations. How could these moves impact global markets […] The post Trade Wars and Market Shifts: A Deep Dive into the Financial Weapons of US-China Tensions first appeared on Nurp.com .

There are much better ways for the #government to spend hundreds of billions of dollars than propping up #Chinese #stocks, argues Victor Shih in this week’s op-ed. Although government intervention can play an important role during #market panics, this rescue attempt likely is not the right medicine for the current troubles besetting Chinese stocks. The funds could be deployed in a more effective way to create a longer-lasting impact on the #economy, and by extension the market. According to Bloomberg, the State Council is considering using some $278 billion parked in the offshore accounts of Chinese state-owned enterprises and #financial institutions, as well as 300 billion RMB ($42 billion) in domestic government-backed funds such as Central Huijin, to prop up the #equity markets in mainland China. First of all, this enormous move would likely reduce the liquidity of SOEs’ overseas assets, rendering them vulnerable to global price and liquidity shocks. According to Chinese central bank #statistics, offshore foreign currency deposits in Chinese banks totaled a little over $200 billion at the end of 2023. So a $278 billion bailout would imply a complete drawdown of Chinese SOEs’ offshore foreign currency deposits in Chinese banks, as well as much of their deposits in foreign financial institutions. To read the full piece, follow the link below:

Kamala And Trump Will Continue China De-Risking. Does That Make China A Turn-Off To Wall Street? https://ift.tt/rEvuyV9 Whether it’s Kamala Harris or Donald Trump at the helm of U.S. foreign policy in January 2025, one thing is likely: the continuation of a strategic decoupling from mainland China. That means Chinese companies outsourcing to or investing in factories in Southeast Asia and maybe even Mexico to keep their market share in the U.S. read more via Benzinga - Stock Market Quotes, Business News, Financial News, Trading Ideas, and Stock Research by Professionals https://ift.tt/u7hjfms August 08, 2024 at 12:16PM

The IMF assesses imbalances to promote global economic stability and prevent financial crises. By monitoring trade deficits, surpluses, and other economic discrepancies, the IMF provides policy recommendations to member countries, encourages preventive measures, and designs adjustment programs when necessary. This helps maintain market confidence, fosters international cooperation, and mitigates systemic risks to the global financial system.

Highly recommend a read of this informative piece by Brad Setser outlining the "balance of financial terror" between the US and China. It includes a very helpful history of Chinese reserve managers' footprint in the US Treasuries and (often overlooked) Agencies markets, and helps to show that Chinese overseas Belt and Road lending has been as much about reserve diversification as "debt trap diplomacy." Abstract below: "The link between financial self-reliance and geopolitical power has long been debated. The unbalanced Sino-American trade relationship has created asymmetric financial ties which generate potential sources of leverage for both parties and will not quickly disappear. Absent a clarifying major crisis, it will be difficult to definitively determine which party has greater leverage. Many in the United States (US) are concerned about indebtedness to its primary strategic rival, and the risks posed by a sudden Chinese withdrawal from US financial markets. US policymakers actively sought to encourage China’s top leadership not to withdraw financing from the market for US Agency securities in the run-up to the global financial crisis. Yet China also sees risks in this unbalanced financial relationship. Chinese policymakers have expressed concern about the domestic political consequences of losses on either their Treasury or Agency holdings and actively have sought to diversify China’s reserves – including by substituting the risk of lending to developing economies for the visibility associated with large holdings of Treasuries in US custodians. China increasingly worries that its dollar holdings and the dollar’s global role increase its vulnerability to potential financial sanctions. Both parties thus worry about the possibility that financial interdependence can be weaponized yet find it hard to extricate themselves from the inevitability of financial interdependence absent a clean break from an entrenched pattern of trade imbalances." https://lnkd.in/eKh_wn2K

Financial interdependence can be weaponized, but it is inevitable given the entrenched pattern of trade imbalances. The “balance of financial terror” is more subtle than meets the eye, and evolved substantially since 2008. Brilliant insights from Brad Setser Ifri - Institut français des relations internationales The link between financial self-reliance and geopolitical power has long been debated. The unbalanced Sino-American trade relationship has created asymmetric financial ties which generate potential sources of leverage for both parties and will not quickly disappear. Absent a clarifying major crisis, it will be difficult to definitively determine which party has greater leverage. Many in the United States (US) are concerned about indebtedness to its primary strategic rival, and the risks posed by a sudden Chinese withdrawal from US financial markets. US policymakers actively sought to encourage China’s top leadership not to withdraw financing from the market for US Agency securities in the run-up to the global financial crisis. Yet China also sees risks in this unbalanced financial relationship. Chinese policymakers have expressed concern about the domestic political consequences of losses on either their Treasury or Agency holdings and actively have sought to diversify China’s reserves – including by substituting the risk of lending to developing economies for the visibility associated with large holdings of Treasuries in US custodians. China increasingly worries that its dollar holdings and the dollar’s global role increase its vulnerability to potential financial sanctions. Both parties thus worry about the possibility that financial interdependence can be weaponized yet find it hard to extricate themselves from the inevitability of financial interdependence absent a clean break from an entrenched pattern of trade imbalances.

China's leadership is showing real pessimism on the Chinese economy -- judging from today's People's Daily frontpage top story, which is on China's 9/26 Politburo meeting. Take-away: China is doubling-down on government intervention to halt market's pessimistic outlook. That includes renewed emphasis on fiscal stimulus, loosening monetary policy, and lifting various restrictive policy hurdles to investment, all in an attempt to salvage China's market confidence. 5 points that stand out from the Politburo meeting's readout: 1. Fiscal stimulus: "Strengthen degree of counter-cyclical fiscal and monetary policy adjustments. ENSURE necessary fiscal expenditures (get made)" Sidebar: - What are "3 guarantees"? Guarantee that people get basic livelihood, get salaries paid, and that offices stay open.  So let's do a verbal logic exercise: When the central government is announcing major fiscal stimulus for the explicit objective of ensuring these, it shows that it feels at this current rate, there is real systemic risks of lights going dark at the local level, if the center doesn't provide assistance asap. 2. Banks: "Implement forceful lowering of reserve requirements and of interest rates" Ok, so it's to lower the cost of borrowing to make Chinese businesses feel more confident about borrowing & investing. Which is fair, it's what US govt does just before presidential elections, too... (#KamalaBump) 3. Housing: "Must respond to people's concerns, 'adjust house purchase restriction policies, and lower interest rates for mortgages." Yes. So Politburo is acknowledging that its restrictive housing policy over the last decade wasn't quite "responding to people's concerns", and that it's, if not wrong-headed and myopic, at least in need of major "rolling updates". 4. Capital markets: "Must reinvigorate capital markets. #Boldly infuse medium-to-long term capital into the market by removing the barriers to entry for social insurance, insurance, and wealth management dollars." 5. Acknowledge existence of widespread bankruptcy risks: "Must support publicly traded companies mergers, acquisitions, and restructurings... and study & unveil new policy measures to protect small and medium investors".

A working group of US Treasury and Chinese officials will meet in Beijing this week to discuss economic cooperation. The meeting is a sign of closer engagement between the two countries following the summit between Joe Biden and Xi Jinping in November. Topics on the agenda include financial stability, cross-border data regulations, capital markets, sustainable finance, anti-money laundering, countering terrorism financing, and views on IMF policies. The meeting aims to establish resilient channels of communication between the United States and China. This comes as both countries have increased engagement since agreeing to stabilize relations. #USChinaRelations #EconomicCooperation #BidenAdministration #TreasuryOfficials #FinancialStability #CrossBorderDataRegulations #SustainableFinance Source: Financial Times, ChatGPT https://lnkd.in/eMVR2Wb6

Also I think that he gets this wrong. A lot of the reason I just disagree is that I've been listening to what the Chinese government is saying and what the public wants. Right now Chinese government is going to push more credit in the economy because people are concerned about employment, and they are in a better position to do so because Evergrande and friends are gone. Getting to 5 percent does not require massive stimulus, and 5 percent is a target so that you get decent amounts of employment growth and spending. The other thing is that a lot you can get just by *being here*. The thing about the Chinese government is that they really can change their mind and they can change their mind quickly. All of the stuff in the last month has been about boosting employment and pushing new technology, and they aren't as worried about financial risk or asset bubbles as they were two or three months ago. The big thing in Hong Kong was Xia Baolong visiting Hong Kong and the messages he was sending was focused on employment and growth so what he is hearing is just not what I am hearing here on the ground. Everything I've heard in the two months suggests that they are moving to a policy of moderate growth, and that contraction is over. One other thing is the role of Xi Jinping. People assume that he is Donald Trump when he just isn't. The thing was that Xi's picture was everywhere around 2020 because he was essentially running for election against Jiang Zemin (or more accurately Jiang's person Hu Chunhua). Now that Hu has been sidelined (he was kicked off the Politburo) and Xi has his team in place, there is no reason for Xi to be that public so all of the stuff is going through Xi's team (Li Qiang and He Lifeng). One weird thing about people is that they assume that Chinese politics involves announcing some big new plan. In fact the plan is something they came up with around 2015. What you are seeing is that they've moved the foot off the brake and are tapping the accelerator, but they are not pushing the pedal to the floor. The big decisions were made back in December. The other thing is that the NPC and CPPCC are *not* rubber stamp legislatures. The final vote on the bills are largely ceremonial but there is a pretty extensive legislative process where people have hearings and room for public comment. ------------------ https://lnkd.in/g4a4S5JJ