The Chinese property market is in crisis
The Chinese property market is in crisis [1][3], causing concerns for the broader economy. Guangzhou and Shenzhen have eased mortgage curbs in an attempt to stimulate demand [1]. Western economists suggest that Beijing should cut interest rates and reinflate the real estate bubble [2]. However, there are concerns about the impact on Chinese banks, which have already reported sluggish profit growth and shrinking profit margins [1]. Policymakers are determined to reduce reliance on real estate, which accounts for over a quarter of economic activity, but the crisis is affecting consumer spending, job opportunities, and businesses’ willingness to invest [3]. As a result, there is a cautious mood as we await interest rate decisions this week and the latest twist in the property crisis.
References: [1] Chinese cities ease mortgage rules in bid to revive … [2] Storm clouds loom for China’s economy [3] China Faces a Crisis in Its Real Estate Sector
According to recent reports, shares of China Evergrande Group, a major real estate developer, have plummeted by 25%. This decline in stock value comes after the detention of several employees from its wealth management unit by the Chinese police. The situation has raised concerns about the future of the company and its financial stability. China’s real estate industry is a significant component of the country’s economy, and Evergrande’s troubles may have broader implications for the sector as a whole. [1][3]
References: [1] China Evergrande shares tumble 25% after wealth … [2] China police detain staff at Evergrande wealth unit [3] China Evergrande shares tumble 25% after wealth …
Crude prices are ticking up on expectations of constraints to supply
As of September 18, 2023, Brent crude is trading at $94.70 per barrel, while US West Texas Intermediate (WTI) crude is trading at $91.20 per barrel. These are the highest prices for both benchmarks since November 2022.
There are a number of factors contributing to the rise in crude prices, including:
- Tight supply: The Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, have been cutting production since April 2020 in an effort to support prices. These cuts have helped to tighten the global oil market and reduce inventories.
- Strong demand: Oil demand is expected to remain strong in the coming months, as the global economy continues to recover from the COVID-19 pandemic. This is particularly true in China, the world’s second-largest oil consumer.
- Geopolitical tensions: The ongoing conflict in Ukraine and sanctions on Russia have also contributed to supply concerns. Russia is one of the world’s largest oil exporters, and its output has been disrupted by the war.
Analysts expect crude prices to remain elevated in the near term, as the market remains tight. However, there are some downside risks, including a potential recession in the global economy or a slowdown in demand from China.
The rise in crude prices is a concern for consumers, as it is likely to lead to higher gasoline and diesel prices. It is also a concern for businesses, as it can increase the cost of production and transportation.
Fed is expected to keep interest rates on hold at its next policy meeting on Wednesday, September 20, 2023.
This comes amid signs that its aggressive interest rate hikes are starting to work in bringing down inflation.
The Fed has raised interest rates by 225 basis points this year in an effort to combat inflation, which is at a 40-year high. The rate hikes have slowed economic growth and raised the cost of borrowing for businesses and consumers. However, there are some signs that the rate hikes are having the desired effect of bringing down inflation.
For example, the consumer price index (CPI) rose 8.5% in the year to July, down from 9.1% in June. This was the first slowdown in CPI inflation since November 2021. Additionally, the producer price index (PPI), which measures the prices paid by businesses for goods and services, rose 9.8% in the year to July, down from 11.3% in June.
While the Fed is likely to keep rates on hold at its next meeting, it is still expected to continue raising rates in the coming months. However, the pace of rate hikes may slow as the Fed assesses the impact of its previous hikes on the economy and inflation.
The Fed’s decision to keep rates on hold is a positive sign for the economy. It suggests that the Fed is confident that the economy can withstand further rate hikes without falling into a recession. However, it is important to note that the Fed is still facing a challenging task in bringing down inflation without causing a recession.
The Bank of England (BoE) is expected to proceed with another interest rate hike at its next meeting on Thursday, September 21, 2023.
This would be the ninth consecutive rate hike by the BoE, as it seeks to combat inflation, which is at a 40-year high in the UK.
However, many economists believe that Thursday’s rate hike could be the last in the current cycle. The BoE is facing a difficult balancing act, as it needs to bring down inflation without causing a recession. The UK economy is already slowing, and further rate hikes could tip it into recession.
The BoE is likely to take a more cautious approach to raising rates in the coming months. It will closely monitor economic data and inflation to assess the impact of its previous rate hikes. The BoE is also likely to be influenced by the decisions of other central banks, such as the US Federal Reserve.
If the BoE does decide to pause its rate hikes after Thursday, it would be a sign that it is concerned about the risks of a recession. It would also be a sign that the BoE believes that its previous rate hikes have been effective in bringing down inflation.
The BoE’s decision on Thursday will be closely watched by businesses and consumers alike. A rate hike would mean higher borrowing costs for businesses and individuals. However, a pause in rate hikes would be a welcome relief for many businesses and consumers who are already struggling with the rising cost of living.
There is a risk that the EU could become as hooked on China batteries as it was on Russian energy.
China currently dominates the global battery market, with a share of over 70%. The EU is heavily reliant on China for imports of battery materials and cells.
This reliance on China is a concern for a number of reasons. First, it makes the EU vulnerable to supply disruptions. If China were to restrict exports of batteries or battery materials, it could have a significant impact on the EU’s economy. Second, it makes the EU more dependent on China for critical technology. This could give China leverage over the EU in other areas.
The EU is aware of the risks of over-reliance on China for batteries and is taking steps to reduce its dependence. For example, the EU has launched a number of initiatives to support the development of a domestic battery industry. The EU is also investing in research and development of new battery technologies.
However, it will take time for the EU to reduce its reliance on China batteries. In the meantime, the EU is still heavily reliant on China for imports. This means that the EU is vulnerable to supply disruptions and to China’s influence.
Here are some of the steps the EU is taking to reduce its reliance on China batteries:
- Investing in the development of a domestic battery industry. The EU has set a goal of producing 60% of the batteries it needs by 2030.
- Diversifying its sources of battery materials and cells. The EU is looking to develop new supply chains with countries such as Australia, Indonesia, and Canada.
- Investing in research and development of new battery technologies. The EU is supporting the development of next-generation battery technologies, such as solid-state batteries.
It remains to be seen whether these steps will be enough to reduce the EU’s reliance on China batteries. However, the EU is clearly aware of the risks and is taking steps to address them.
