Investment Newsletter – August 2022
China’s military exercises highlight the risk that Taiwan tensions could exacerbate existing supply chain woes. The Taiwan Strait is the primary route for ships passing from China, Japan, South Korea and Taiwan to points west. According to data compiled by Bloomberg, almost half of the global container fleet and 88% of the world’s largest ships by tonnage passed through the waterway this year. The planned drills would be the most serious show of force by China around Taiwan since at least 1995, when Beijing test-fired missiles into the sea near the island. Hence, further acceleration in deglobalization.
President Biden is facing an alarming level of doubt from inside his own party, with 64% of Democratic voters saying they would prefer a new standard-bearer in the 2024 presidential campaign, according to a New York Times/Siena College poll, as voters nationwide have soured on his leadership, giving him a 33% job-approval rating. More than three-quarters of registered voters see the United States moving in the wrong direction, a pervasive sense of pessimism that spans every corner of the country, every age range and racial group, cities, suburbs and rural areas, as well as both political parties.
Having argued that inflation was transitory and failed in the attempt, a motley assortment, including a Fed chairman, a Treasury Secretary, and many practitioners in Wall Street, are trying to tell us that there is no sign of a recession despite two consecutive quarters of negative GDP growth. The current argument goes that unemployment and consumer spending are still strong, but the yield curve is a “leading indicator” of what is happening in the economy currently, as opposed to economic data, which is “lagging” and subject to massive revisions.
In the second half of 2022, China’s economy may face four challenges with overlapping risks: First, repeated local epidemics will restrict economic operation; Second, foreign demand in developed countries continue to shrink, causing China’s exports to decline; Third, both supply and demand of real estate will continue to drag on domestic demand growth; Fourth, US-China tensions flare on Taiwan issues. If these four types of risks can be effectively resolved, there is a high probability of returning to the normalized growth range in the second half of the year. However, if the four types of risks are superimposed, the endogenous driving force may continue to be weak. Further intensify policy efforts to stabilize the macroeconomic market are required to ensure the economy operates within a reasonable range.
The current liquidity in China is relatively loose, and the fluctuation of the scale of reverse repurchase investment reflects a more refined operation of short-term liquidity investment, ensuring that there is no shortage or excess of liquidity. A total of RMB 100 Billion was injected into the market via the medium-term lending facility (MLF) in July to maintain liquidity in the banking system at a reasonably sufficient level, hence, creating a suitable monetary and financial environment for economic recovery.
