The issue is simple: developments in China are far more important to the global economy than anything the Fed might, or might not, do in 2 weeks’ time. China, after all, was responsible for half of the $35tn of global stimulus since 2009, compared to the Fed’s $4tn. And China’s New Normal policies mean that it is setting off in a completely new direction, aimed at avoiding the “middle income trap”.
- One key implication of this shift is that the Old Normal, with its focus on export-led development and wasteful property speculation is becoming less and less relevant to China’s economic growth
- Instead, China is seeking to build a modern services-led economy based on the mobile internet
This development has been underway since President Xi Jinping took office in March 2013. It was reinforced in last month’s 5th Plenum which finalised the new Five Year Plan for 2016 – 2020 (as we discuss in the latest ‘pH Report‘). This new direction has created the Great Unwinding of policymaker stimulus since August 2014, as the chart shows:
- The oil price is down 57% since then, and the market continues to be over-supplied; while the US$ Index is up 23%, having returned to the 100 level last week
- The second stage of the Unwinding began in January: since then, the benchmark US Treasury 10 year bond rate has also risen by 23% – a quite astonishing increase
When forecasting this development in September 2014, I argued the rationale would be that:
“Investors might be forced to raise cash quickly to meet margin calls, if commodity markets start to dive. This could force them to sell low-risk assets such as US Treasuries, causing interest rates to rise”
When I made this forecast, most commentators were still expecting rates to fall, not rise. And even today, most are still blind to what has happened – they believe the Fed rules the global economy, and ignore developments in China.
I will look at the critical implications of this major move in the world’s benchmark interest rate on Wednesday.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 57%
Naphtha Europe, down 51%. “Demand bolstered by gasoline exports to US – Exports to Asia still healthy”
Benzene Europe, down 56%. “There are more crackers expected to be coming back online by early next month, which should help keep availability ample.”
PTA China, down 41%. “Market expected to continue with its present state of supply and production capacity overhang”
HDPE US export, down 33%. “Prices for domestic exports moved up on thinning supply”
¥:$, down 20%
S&P 500 stock market index, up 7%