Macro Insights Weekly: Credit risk in China; taper scenario in the US

The world’s two largest economies address contrasting themes, as China deals with the growth implications of a softer property market, and the US considers policy normalisation.
Group Research27 Sep 2021
  • Managing the incipient financial stress and spillover risk are key for the authorities
  • PBOC is helping with liquidity injection and assurances about financial stability
  • Are the authorities ready to accept lower growth in their quest for greater housing affordability?
  • In the US, the Fed has turned marginally hawkish
  • Taper and rate hike would be separate considerations
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Commentary: Credit risk in China; US taper

Assessing the China outlook

The past week came and went with considerable concern regarding the fallout from the financial difficulties of China’s property giant Evergrande. While there were indications that a domestic payment due last Thursday would be honoured, considerable uncertainty remained over payment to offshore investors, which include several major international asset managers. Managing the incipient financial stress and spillover risk is the key focus of the authorities, with the PBOC stepping in with liquidity injection and assurances being provided about financial stability.

We are keen to look beyond the immediate financial market dynamics and consider the medium-term implication for China. Given that real estate production and property services account for 29% of the nation’s GDP, a sharp slowing of property transactions and price decline would not only affect the financial sector, but they would also likely cause economic growth to slow appreciably. Are the authorities prepared to accept that in their quest for greater housing affordability?

Fed shifts toward taper

On to the US, we read last Thursday’s FOMC statement and comments as marginally more hawkish than the tone of the June meeting, especially since Chair Powell did not push back in a dovish manner during the press conference. The Fed’s new forecasts are very much in line with our forecasts published last month.

As important as they are, we don’t think US economic and market considerations will dominate forthcoming deliberations, as several additional complicating factors are playing out. These include, bickering in the Congress over increasing the debt ceiling; risk of financial turbulence spilling over from China; and uncertainty about the composition of the Fed board in 2023 (new members are very likely to be on the dovish side). The timing of tapering may end up being quite separate from the timing of interest rate increases, as these considerations play out.

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Taimur Baig, Ph.D.

Chief Economist - Global

Chang Wei Liang

FX & Credit Strategist, Global

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