CHINA’S ECONOMY STRUGGLING

China reported October GDP as lower than expected while inflation has been accelerating. There is concern that China may stumble into a stagflation period driven by problems in the real estate sector and manufacturing.

Stagflation is when the economy is simultaneously experiencing stagnant activity and accelerating inflation. The phenomenon was first recognized in the 1970s when an oil shock prompted an extended period of higher prices but sharply falling GDP growth.

Big tech, real estate and even video games are being targeted by new regulations in China. These new regulations could be yet another sign that the Chinese government is trying to reign in the business sector. The goal appears to be breaking up the largest corporations into smaller pieces to prevent systemic risk. The government will do what they can to manage the economy but Evergrande is a problem that nobody wants.

Globally bond refunding is now being withdrawn which will reduce inflation. Into the 2022 and 2033 its expected that nominal rates may rise to 1% to 1.25% which will normalize bonds and other securities. Into 2025 its expected rates may reach 1.5% to 2% depending on economic performance.

The global corporate tax deal will have some impact on corporate earnings. It will also hurt the competitive tax deals the US and others use to get business to locate there. Globalization changes will be driven more from a risk management perspective than anything.

More puzzling is that China is spending a fortune building up a larger nuclear arsenal. The Pentagon figures China may have 1000 warheads by 2030 as it looks to expand its overall military power. The report also raises concerns over Beijing’s increasingly aggressive behavior toward Taiwan.