China is bracing for the upheaval caused by the impending weakening of the US economy, which enters an election cycle in 2024. The focus is on the looming trade and currency war and the trade turmoil caused by a possible further easing of monetary policy. from the Federal Reserve. China’s economic policymakers are expected to attend the central economic policy conference in Beijing soon to decide on economic targets for 2024.
When China’s leaders gather in the coming days to examine its sluggish post-pandemic economic recovery and set next year’s growth targets, external uncertainties shaped by the U.S.-centered global economic downturn appear to be at the forefront of their discussions. behind closed doors, as pointed out by the Chinese media. The positive impact for China of possible interest rate cuts by the US Federal Reserve, which could ease pressure on the yuan and lead to greater investment capital inflows, has been highlighted.
The reduction of interest rates
But there are concerns about how Washington policymakers will behave during the coming election year and how their actions could cause turmoil in the world’s second-largest economy and the global system.
A year ago, monetary authorities warned of a “turbulent” international environment and the impact it could have on China’s economy, as they targeted “around 5%” of GDP growth.
Interest rate forecasts
The most aggressive cycle of US interest rate hikes in 40 years – a total of 525 basis points since March 2022 – will soon end and that the first rate cut could take place as early as mid-2024. The Fed’s interest rate policy moves will benefit the Chinese economy in the short term and allow for greater maneuverability in China’s monetary policy.
Expect China’s leaders to maintain a 5% GDP growth target for 2024 to allow room to deal with projected turbulence, while expansionary fiscal policy could be an option after Beijing’s decision last month to issue 1 trillion yuan (US$140 billion) in government bonds.
The move pushed China’s budget deficit to around 3.8%, well above the 3% target set in March. On the other hand, the risk that the US debt mountain, which has exceeded 33.7 trillion, will “burst”. dollar is important as the consequences are expected to be uncontrollable.
Gradual increase in exports
The rate cut cycle should eventually lead to lower funding costs for businesses – positive for trade flows, while any increase in net exports would likely be gradual as initial rate cuts would be small.
But the Chinese economy, in terms of exports and capital flows, is much more affected if US-China relations continue to improve in an election year than by other factors such as Fed rate cuts or the interest rate differential between the two countries .
In dollar terms, China’s exports to the US in the first 10 months of the year shrank 15.4% year-on-year, more than double the 5.6% decline in the country’s total exports over the same period, but the share of exports in the US they still account for 15% of China’s total.
A meeting between Presidents Xi jinping and Joe Biden last month built on the momentum of rising trade exchanges in recent months.
But how long this momentum can continue is questionable, given that elections tend to bolster calls for a tough stance on China, as well as calls for so-called “disengagement.” On the other hand, China itself wants to “disengage” from what it sees as a sick economy which is expected to cause significant turbulence in the global economy and financial markets.
Disconnection and geopolitical parameters
The expected pause in the rise or rate cut would be good news for the yuan, but not so much for Chinese exports, as it would make them more expensive in the short term. Geopolitical tensions with the US are a more important factor affecting trade and investment.
On the other hand, the consensus for a tough stance on China is bipartisan and that the only difference between the candidates in the US election will be “the extent of that tough stance required”, given that the ongoing trade war and the emerging technological war will continue to weigh on China’s economic prospects.
The key issue is whether Washington responds to Beijing’s call for the two sides to clearly set national security boundaries for trade and business exchanges. But for the Chinese economy to overcome the influence of US economic cycles and electoral politics, Beijing still has work to do in terms of reform and expanding market access.
The safe bet
More reform and opening up is the safest bet for the Chinese economy, regardless of whether US interest rate cuts act as a tailwind or if the US election could mean more turmoil.
