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FINANCE

China just reminded the United States that Beijing is its banker

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Markets took a hit following a Bloomberg News report that cited unnamed Beijing officials as saying that China, the largest holder of U.S. Treasurys, could slow or even halt its purchases of that debt.

U.S. stocks on Wednesday snapped a six-day winning streak, and Treasury yields, already in an upswing, moved higher with the 10-year reaching 2.597 percent, their highest level since March 15. Bond yields rise when bond prices fall.

China’s foreign exchange regulator publicly refuted the Bloomberg report on Thursday, saying it cited “false information.” But experts say the jolt to markets may have been designed as a warning to Washington over trade and other issues.

Political message?

China holds $1.2 trillion of U.S. debt — more than any country. When it buys U.S. bonds, it is effectively lending money to the United States. Washington uses bond sales to China and others to help finance itself.

The curve thrown into markets this week comes as President Donald Trump appears poised to counter China on its huge trade surplus with the United States, and as Washington loses patience with Beijing over its handling of the North Korea nuclear crisis.

On Thursday, the Chinese regulator soothed market worries when it said it was already diversifying its foreign exchange reserves, and its Treasury holdings are “market driven.”

China is sending another message as well, Rajeev de Mello, head of Asian fixed income at Schroders Investment Management, told CNBC on Thursday.

China “will not just lay passive if the U.S. administration imposes tariffs,” he said. “I think that’s the position they want to be in, that they are a major player and not a small country on the receiving end of the U.S. big stick.”

Beijing’s indication that it’s not “tied to U.S. bond-buying” indicates more “hardball’ between the world’s two biggest economies, said Vishnu Varathan, Mizuho Bank economist.

“Ithas to be seen as a prelude to possible trade tension, without being a very explicit threat,” added Jens Nordvig of Exante Data.

Making ‘the Treasury’s job harder’

In a note Wednesday, brokerage firm Jefferies said that “If China stops buying Treasuries, the market could suffer.”

U.S. spending is seen rising this year, and most independent analysts expect U.S. tax revenue to fall under the GOP’s new tax plan.

Treasury financing needs are going to rise significantly in 2018 compared with recent history, said Jefferies, so the Treasury Department is going to be looking for as many sources of demand as it can find. “China turning away from the market potentially makes Treasury’s job harder.”

The reports out of China affected a market that bond investor Bill Gross, among others, have already said is under pressure. Broadly, central banks are moving away from global bond markets, with the Bank of Japan already trimming purchases of Japanese government debt. (Japan is the second-biggest holder of U.S. Treasurys, after China.)

China faces limits to how much it can do

While China can certainly diversify its reserves, the People’s Bank of China (PBOC) does have to deal with certain constraints, said London-based Capital Economics.

“The PBOC may be able to find better returns elsewhere, but the ability to liquidate assets at that sort of rate (that’s possible with U.S. Treasurys) is a powerful draw. This explains why the share of reserves allocated to the U.S. market appears to have been stable over time,” the research house said in a note on Wednesday.

China’s foreign exchange reserves are growing again, so Beijing will have few options but to buy U.S. Treasurys, added Mark Jolley, a strategist at CCB International Securities. China needs to invest its foreign exchange reserves in order to help it manage the value of its own currency, the yuan.

Beijing may harbor real worries about the value of U.S. bonds, because of higher U.S. debt stemming from the recent tax reforms, among other reasons. But China is “unlikely to shoot itself in the foot with imminent and large-scale selling of its U.S. Treasurys,” said Mizuho’s Varathan.

Rather than dumping bonds, Beijing will probably reduce Treasurys investment incrementally, limiting the impact on the market, said Varathan.

Instead, Beijing is conveying a message that will serve as a “Sino-U.S. bargaining chip,” Varathan said.

We’ve been here before

This is not the first time China has threatened to back off Treasurys.

In 2009, amid the Global Financial Crisis and early in Barack Obama’s first term in office, former Chinese Premier Wen Jiabao told reporters that China has “lent a huge amount of money to the U.S.” and “of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

China was the largest holder of U.S. sovereign debt at that time, too.

Its Treasury holdings are greater now than they were then.

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German central bank issues warning on economy

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Germany’s GDP could stagnate or even decline in the third quarter, Bundesbank has warned

The German economy has been shrinking over the past two years and will remain stagnant for the rest of the year as it continues to grapple with economic malaise, Bloomberg reported on Friday.

According to a survey conducted by the outlet, the EU’s top economy has been stalling in the three months through September, marking a deeper-than-expected decline.

Economists have already started downgrading their forecasts for this year, with some now seeing protracted stagnation or even another downturn.

“While we expect the market to see a mild recovery at the end of 2024 and in 2025, much of it will be cyclical, with downside risks remaining acute,” Martin Belchev, an analyst at FrontierView told Bloomberg.

He warned that the faltering automotive sector will further exacerbate downward pressures on growth as the top four German carmakers have seen double-digit declines.
Thousands of EU automotive jobs at risk – Bloomberg

The country’s central bank said on Thursday in its monthly report that the German economy may already be in recession. According to the Bundesbank, gross domestic product (GDP) “could stagnate or decline slightly again” in the third quarter, after a 0.1% contraction in the second quarter.

Economic sentiment in the country has suffered due to weak industrial activity, Budensbank President Joachim Nagel said on Wednesday.

“Stagnation might be more or less on the cards for full-year 2024 as well if the latest forecasts by economic research institutes are anything to go by,” he said.

German industry is struggling amid weak demand in key export markets, shortages of qualified workers, tighter monetary policy, the protracted fallout from the energy crisis, and growing competition from China, Bloomberg noted.

The Eurozone’s largest economy has been falling behind its peers over the past years, largely due to a prolonged manufacturing downturn. Germany was the only Group of Seven economy to contract in 2023.

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Thousands of EU automotive jobs at risk

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A third of the region’s major car plants are currently operating at half capacity or less, according to a report

European auto makers are facing more plant closures as they struggle to keep up with the electric vehicle (EV) transition amid slowing demand and growing competition, Bloomberg reported on Wednesday.

According to the outlet’s analysis of data from Just Auto, nearly a third of the major passenger-car plants from the five largest manufacturers – BMW, Mercedes-Benz, Stellantis, Renault and VW – were underutilized last year. The auto giants were producing fewer than half the vehicles they have the capacity to make, the figures showed.

Annual sales in Europe are reportedly around 3 million cars below pre-pandemic levels, leaving factories unfilled and putting thousands of jobs at risk.

The report pointed out that sites shutting down would add to concerns that the region is facing a protracted downturn after falling behind key competitors, the US and China.

“More carmakers are fighting for pieces of a smaller pie,” Matthias Schmidt, an independent auto analyst based near Hamburg, told Bloomberg. “Some production plants definitely will have to go,” he warned.

VW announced last week it was considering closing factories in Germany for the first time in its near nine-decade history. The automaker said it was struggling with the transition away from fossil fuels.

BMW has warned that tepid demand in China poses a further threat to sales and profits.

Volkswagen planning major cutbacks in Germany

The threat of factory closures in Europe has worsened in recent years amid skyrocketing energy prices and worker shortages that have driven up labor costs.

“Failure to turn things around would deal a blow to the region’s economy,” Bloomberg wrote, pointing out that the auto industry accounts for over 7% of the EU’s GDP and more than 13 million jobs.

Car-assembly plants often are “anchors of a community,” securing work at countless nearby businesses, from suppliers of engine parts and trucking companies to the local bakery delivering to the staff cafeteria, the report said.

Closing plants is usually “the last resort” in a region where unions and politicians have a strong hold over corporate decision-making, concluded Bloomberg.

There’s “massive consolidation pressure” for auto plants in Europe, Fabian Brandt, an industry expert for consultancy Oliver Wyman, said. “Inefficient factories will be evaluated, and there will be other kinds of plants that shut down,” he claimed.

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Global debt balloons to record highs

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It’s now $45 trillion higher than its pre-pandemic level and is expected to continue growing rapidly, a top trade body has warned

The global debt pile increased by $8.3 trillion in the first quarter of the year to a near-record high of $305 trillion amid an aggressive tightening of monetary policy by central banks, the Institute of International Finance (IIF) has revealed.

According to its Global Debt Monitor report on Wednesday, the reading is the highest since the first quarter of last year and the second-highest quarterly reading ever.

The IIF warned that the combination of such high debt levels and rising interest rates had pushed up the cost of servicing that debt, prompting concerns about leverage in the financial system.

“With financial conditions at their most restrictive levels since the 2008-09 financial crisis, a credit crunch would prompt higher default rates and result in more ‘zombie firms’ – already approaching an estimated 14% of US-listed firms,” the IIF said.

Despite concerns over a potential credit crunch following recent turmoil in the banking sectors of the United States and Switzerland, government borrowing needs to remain elevated, the finance industry body stressed.

According to the report, aging populations and rising healthcare costs continue putting strain on government balance sheets, while “heightened geopolitical tensions are also expected to drive further increases in national defense spending over the medium term,” which would potentially affect the credit profile of both governments and corporate borrowers.

“If this trend continues, it will have significant implications for international debt markets, particularly if interest rates remain higher for longer,” the IIF cautioned.

The report showed that total debt in emerging markets hit a new record high of more than $100 trillion, around 250% of GDP, up from $75 trillion in 2019. China, Mexico, Brazil, India and Türkiye were the biggest upward contributors, according to the IIF.

As for the developed markets, Japan, the US, France and the UK posted the sharpest increases over the quarter, it said.

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