Daily Comment (April 10, 2024)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with a major new speech by a top European Union policymaker that calls for greater US-EU coordination to counter China’s unfair trade practices — a call that is likely to anger Beijing and fuel greater tensions between the West and China. We next review a wide range of other international and US developments with the potential to affect the financial markets today, including a new downgrade to the outlook for China’s credit rating and an Arizona Supreme Court ruling that could have an important impact on the US elections in November.

United States-European Union-China: In a major speech yesterday, European Commission market competition chief Margrethe Vestager called for the US and the EU to team up and present a more systematic, coordinated approach against China’s unfair trade practices. To protect their key industries of the future, Vestager outlined a strategy in which the US and EU, working together, could convince the Group of 7 countries to erect trade barriers against subsidized Chinese products being sold in the West at artificially low prices.

  • Vestager also announced that the EU is launching an anti-dumping probe into Chinese wind turbines, just as it previously announced an investigation into the likely dumping of low-cost Chinese electric vehicles on the EU market.
  • According to Vestager, “We saw the playbook for how China came to dominate the solar panel industry . . . We see this playbook now deployed across all clean tech areas, legacy semiconductors, and beyond, as China doubles down on a supply side support strategy to address its economic downturn.”
  • The new anti-dumping probe is certain to generate complaints, pushback, and perhaps even retaliation by Beijing. Indeed, some European officials are likely to push back against the probe out of fear that China will retaliate by imposing new restrictions on their trade or investment flows. In the past, those concerns have limited the EU’s actions against China. However, faced with yet another onslaught of subsidized Chinese goods, the EU may ultimately impose tougher restrictions this time, as Vestager calls for.
  • In any case, Vestager’s tough speech is a sign that economic tensions between the West and China aren’t going away anytime soon. They actually look set to worsen, since the Chinese government is likely to retaliate in one way or the other and shows no sign of wanting to shift away from its investment/export economic development strategy toward a consumption-led model.

Japan-China:  In a new survey by Japanese news firm Yomiuri Shimbun, 92% of respondents said China is a threat to Japan’s national security, versus 86% who said the same in 2023 and 81% who said so in 2022. The responses help explain Tokyo’s enthusiastic support for the US effort to strengthen allied defense efforts against China’s increased geopolitical aggressiveness in the Indo-Pacific region. The results also suggest tensions between China and the westernized liberal democracies will continue to increase going forward.

China: Reflecting China’s slowing economic growth, slumping property market, and rising fiscal deficit, Fitch today maintained its A+ rating on the country’s sovereign debt but cut its outlook from stable to negative. The move follows a similar one by Moody’s in December, in which that company maintained its A1 rating on China’s long-term debt but also cut its outlook from stable to negative.

  • China’s burgeoning public sector debt stems mostly from fiscal shortfalls at the provincial and local government levels. The central government has begun to issue its own new debt to rescue some of those lower-level governments, but that is putting new fiscal pressures on Beijing.
  • The rising debt challenges compound other structural economic challenges that have come to light in recent years, such as excess industrial capacity, weak consumer demand, poor demographics, decoupling by foreign countries, and the disincentives from the Communist Party’s increasing intrusions into the economy.
  • Not only are China’s debt and other structural economic problems creating headwinds for the country’s own economy and financial markets, but they are also holding down growth in some other countries.

Australia: The government said today that it will toughen the country’s corporate merger rules amid concerns that increased market concentration is stifling competition and boosting prices. Under the plan, the government will give the Australian Competition and Consumer Commission added powers to scrutinize mergers above certain value and market-share thresholds. The ACCC would also be given authority to stop small serial acquisitions that could reduce competition over time, bringing Australia’s rules in line with those of most other developed countries.

Eurozone: Big US money managers are reportedly shifting their bond purchases from US Treasuries to eurozone obligations in hopes that the European Central Bank could begin to cut its benchmark interest rate sooner and faster than the Federal Reserve will cut US rates. The improved outlook for eurozone bonds reflects Europe’s much weaker economy and rapidly falling inflation. In contrast, strong economic growth in the US is keeping price pressures high and threatening to delay the Fed’s interest-rate cuts.

US Politics: Responding to the US Supreme Court decision in June 2022 that rolled back federal protections for abortion, the Arizona Supreme Court yesterday ruled that a nearly total ban still on the books from Arizona’s territorial days must be reinstated. The move follows a recent Florida Supreme Court ruling that also allowed tighter restrictions, even as it approved a referendum on abortion rights in the November election.

  • Although the rulings will have no discernible impact on the US economy or financial markets, they have the potential to affect the upcoming elections.
  • Given that Democrats have shown they can exploit the June 2022 ruling that overturned Roe v. Wade, the rulings could help the party in Arizona, Florida, and even in other key swing states, despite current polling showing greater support for former President Trump than for President Biden.

US Postal System:  The US Postal Service has requested permission to boost the price of a first-class stamp by an additional 5 cents. If approved in the coming weeks by the Postal Regulatory Commission, the cost of a stamp would rise on July 14 to $0.73, up 10.6% from one year earlier.

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