Daily Comment (January 26, 2021)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with news from China, where new data showing a surge of foreign direct investment into the country last year is being tempered by a new move by the central bank to reduce liquidity in the financial markets.  This move helps explain why Chinese equities are down today.  We also examine other key news from overseas, including a potentially groundbreaking move by some German government officials to temporarily abandon a long commitment to balanced budgets.  As always, we conclude with the latest coronavirus news.

China:  According to new data from the United Nations Conference on Trade and Development, foreign direct investment in China rose 4.0% last year, making it the top destination for such capital flows.  While the U.S. had long been the top destination, its inbound FDI plunged 49% in 2020 amid the coronavirus pandemic.  Note that our current WGR series on the U.S.-China balance of power will next week examine how the two countries’ outbound FDI and other economic elements play into their global influence.  The current installment of the series, published here, provides a deep dive into the U.S.-China military balance.  Separately, the People’s Bank of China today withdrew 78 billion yuan ($12 billion) of net liquidity through its open market operations, boosting the overnight repo rate to more than 2.8% — its highest level since late 2019 — from 2.5% the previous day.  Local media reports quote a PBOC advisor saying tighter liquidity is needed to cut the risk of asset bubbles forming.  As might be expected, the moves have driven Chinese equity markets sharply lower today.

United States-China:  In his address to the World Economic Forum’s online convention, Chinese President Xi issued a veiled warning to the new Biden administration not to try to rally allies against Beijing in an attempt to hem it in.  According to President Xi, such efforts would only “push the world into division and even confrontation.”

United States-Iran:  In preparation for a potential war with Iran sometime in the future, the U.S. military has been trying out an array of ports and air bases in Saudi Arabia’s western desert to see whether they could be used in the event of a conflict.

Germany:  A dispute has broken out in Chancellor Merkel’s Christian Democratic Union party over a proposal by her chief of staff to abandon Germany’s strict curbs on budget deficits as the pandemic continues to put huge strains on the country’s finances.  While Chief of Staff Braun isn’t calling for a permanent end to the constitutional “debt brake,” he argues that the constitution should be amended to allow for a multi-year series of declining budget deficits to respond to the coronavirus pandemic.  Nevertheless, the proposal is a stark break from Merkel’s economic orthodoxy.  If passed and extended, it would have the potential to give Germany a freer hand in economic policy and geopolitical strategy.

Italy:  Prime Minister Conte is set to resign today, his office stated, amid disagreements about how Italy should use the €200 billion it will receive as part of the EU’s new pandemic relief program.  Despite winning a vote of confidence in both houses of parliament last week, Conte has been weakened by the withdrawal of former Prime Minister Renzi’s party from his coalition government.  Italy’s parties are now set to negotiate in search of a new governing majority, possibly under the stewardship of Mr. Conte once again but perhaps under a new premier. If no majority in Parliament can be found, Italy is likely to hold elections in coming months, which would be the first in a major West European country since the start of the pandemic.

India:  In a sharp escalation of the protests against Prime Minister Modi’s agricultural reforms, thousands of farmers driving tractors have breached police barricades and invaded the center of the capital city in an effort to disrupt the annual Republic Day celebration.  It remains to be seen whether the farmers, who are a huge part of the country’s electorate, will be able to make Modi back down from his proposed changes.

COVID-19:  Official data show confirmed cases have risen to 99,808,397 worldwide, with 2,142,826 deaths.  In the United States, confirmed cases rose to 25,298,554, with 421,239 deaths.  Vaccine doses distributed in the U.S. now total 41,418,325, while the number of people who have received at least their first shot totals 19,252,275.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


 Economic and Political Impacts

  • In an update to its global economic forecasts, the International Monetary Fund said China and the U.S. will by far be the most successful at steering their economies through the pandemic, leaving Europe and other emerging markets trailing in their wake.  The fund predicts that by 2022, the recoveries in the US and China will leave their economies no more than 1.5% smaller than projected before the pandemic.  Other advanced economies will still be 2.5% short of their pre-pandemic path, while emerging economies, excluding China, will in 2022 be 8.0% smaller than expected in forecasts issued exactly a year ago.

 U.S. Policy Response

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