Finimize - 🇨🇳 China hits a wall

👀 What just happened?

US

• The Federal Reserve (the Fed) hit a key milestone with its quantitative tightening program.
• Economists' forecasts for global growth this year and next revealed a widening divergence.

Europe

• Saudi Arabia and Russia extended their voluntary supply curbs until the end of the year.
• British chip design firm Arm reached for a valuation of up to $54.5 billion.

Asia

• China’s trade slump eased in August.

✍️ What does all this mean?

As part of its most restrictive monetary measures in years, the Fed is letting $60 billion in Treasuries and $35 billion in mortgage-backed securities mature without reinvestment every month. And this "quantitative tightening" reached a key waypoint last week: the Fed had shed $1 trillion in bonds since starting balance sheet reductions last year. Fortunately, this has been achieved without causing the market strains that alarmed policymakers in previous efforts.

With consumer demand and the labor market both flexing some muscle, especially in the US, economists have boosted this year's growth estimates to 2.4%. But they’ve been cutting their 2024 forecasts too, most recently to 2.1%, according to Consensus Economics. The crux of the argument is that 2023 has been outpacing expectations, and that’ll make it challenging for 2024 to match up – especially if this year’s robustness prompts central banks to keep interest rates high, potentially slowing global economies.

A key measure of international oil prices soared above $90 a barrel for the first time in 2023 last week after Saudi Arabia and Russia said they’d extend their voluntary supply cuts. Saudi Arabia has cut one million barrels daily since July, a temporary move that’s now been extended until the end of the year. Russia, similarly, has curbed exports by 300,000 barrels daily but is extending the reduction to year-end.

Arm is set to raise up to $4.9 billion in its upcoming initial public offering (IPO), and that’s less than initially expected because its owner SoftBank decided to hang onto a heftier share in the company. Mind you, it’ll still be the world's biggest IPO this year, and would value Arm at up to $54.5 billion – or roughly 20 times its recently disclosed annual revenue. That lofty valuation reflects a belief that Arm will benefit from the stampede toward generative AI and the chips needed to power the technology – an industry shift that has helped boost Nvidia’s valuation to $1.2 trillion.

China’s trade slump eased in August, with exports falling 8.8% in dollar terms from a year earlier and imports slipping 7.3%. Both were actually better than feared and far less severe than July’s dips of 14.5% and 12.4%, respectively. And August’s milder decline in imports could be a sign that the downturn in domestic demand may be bottoming out. That’s what Chinese policymakers are hoping for: they recently introduced a series of measures to boost business confidence and support the struggling property market.

🔍 This week’s focus: China's growth hits a wall

Goldman Sachs estimates that China’s housing crisis will reduce the country’s economic growth by 1.5 percentage points this year. That real estate slump, combined with falling exports and fading confidence in the government’s management of the economy, has led to a downshift to a slower growth path sooner than many experts had anticipated. The country is contending with some deeper, longer-term challenges too, with the nation’s population shrinking in 2022 for the first time in six decades.

Taken altogether, China is no longer set to overtake the US as the world’s biggest economy in the near future. That’s according to a new analysis by Bloomberg Economics, which forecasts that it will now take until the mid-2040s for the size of China’s economy to exceed the US’s. Even then, the lead will be marginal and short-lived. That’s not what people thought a few years ago: before the pandemic, China was expected to take and hold the number one position as early as the start of the next decade.

📅 The week ahead

• Monday: Earnings: Oracle.
• Tuesday: UK labor market report (August).
• Wednesday: US inflation (August), UK economic growth (July), eurozone industrial production (July).
• Thursday: European Central Bank interest rate announcement, US retail sales (August). Earnings: Adobe.
• Friday: China retail sales and industrial production (August), US industrial production (August).