The financial distress of Evergrande, the large Chinese property conglomerate, has spooked the Hong Kong and Chinese markets. Selling is spreading to other heavily borrowed property companies that may also struggle to repay their debts.
No-one can be sure how far the Chinese authorities will allow these credit pressures and defaults to go before they prop the system. They will doubtless not wish to see a systemic collapse but look as if they wish to teach rich property entrepreneurs and buyers of expensive flats a lesson about the new face of egalitarian China.
Markets assume there will be further reductions in bank reserve ratios to allow more credit to be extended generally, and a possible further drift down in the interest costs of loans. The Peoples Bank of China tell us it is committed to stability, to no systemic disasters, and to more credit being extended selectively to lowly borrowed provinces and certain preferred and targeted sectors. The bears will not be fully vanquished until we see the line the Chinese authorities intend to defend and see how much of a boost will emerge to avoid a progressive collapse spreading more widely.
US budget impasse
Meanwhile, on the other side of the world US president Joe Biden’s “run-hot” strategy is meeting dogged resistance from the Republicans. The Democrats need to lift the debt ceiling from early October to be able to continue with their large fiscal stimulus plans. They are seeking cross party support to get the 60 votes in the Senate needed to carry a proposal.
The Republican leadership says they oppose the new $3.5 trillion package so have no intention of voting for a lifting of the debt ceiling which would facilitate that. The Democrats claim the Republicans have to own past debts and need to vote with them to avoid a shutdown of government for lack of money with or without the extra stimulus.
The Republicans counter by saying the Democrats can use other procedures to pass the debt ceiling in a measure needing just a simple majority relying on Democrat votes. So far only 4 Republican Senators have shown disagreement with the Republican line, well short of the ten rebels it will take to pass the debt ceiling measure the normal way. Markets assume, one way or another, the debt ceiling will be lifted and the US government will pay its bills, but it could be lively until Congress does give its consent.
The shortage of energy worldwide is causing some worries about individual business areas that rely on plenty of cheaper energy. It is also creating some interruption to supply chains of a kind we got used too during covid lockdowns.
It seems likely one day more wind will blow in more places easing the demand for gas to generate electricity, and in the US lost gas output from the hurricane will come back. It is also likely Russia’s President Putin will do a deal with Germany and allow more gas to flow through the new gas pipeline for the purpose.
We have seen shortages and price spikes in iron ore and timber post lockdown come and go as supply and demand sort themselves out. In the short term it allows some to earn super profits from scarcity and others to lose business from shortages or controls.
Markets are having to adjust to a world where the leading central banks are more concerned by rising inflation, even though they tell us it is a transitory problem. There will be more gradual moves to tapering or stopping quantitative easing programmes, and in some cases edging interest rates up from very low levels.
South Korea, Hungary, and the Czech Republic have already raised rates at their last change. No advanced country Treasury or central bank yet wants to stop economic recovery, but they do recognise some conflict between growth and inflation which is leading to a measured reduction in stimulus. They are also having to adjust to greater tensions between China and the US, highlighted by recent defence announcements between the US and Australia, and by the strengthening of policies to increase national capabilities and resilience in place of more imports.
All this underlines the current high level of valuations of many markets and shares and places more emphasis on the need to be cautious about new commitments and about running too much risk after such a good bull run.
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Market worries persist
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