Finance

“Of fowls after their kind,” the Lord said to Noah, “and of cattle after their kind, of every creeping thing of the Earth after his kind, two of every sort shall come unto thee.” Co-operation from the animal kingdom helped make the biblical patriarch history’s greatest conservationist, saving every land-based animal, including humans, from a wave of divine extinction.Unlike Noah, contemporary conservationists face constraints: they cannot save everything. The patriarch was able to fit a breeding pair of each of the 5.6m or so terrestrial species onto his 300 cubits-long ark. If he was forced instead to ration his space, facing the traditional economic problem of scarce resources and unlimited wants, which animals should Noah have prioritised and kept safe from the flood for future generations?This was the dilemma Martin Weitzman, an economist, posed in a paper published in 1998, and it is one that carries enduring lessons. Weitzman’s goal, beyond biblical interpretation, was to create an economic theory of conservation, calculating a strategy that a rational conservationist could follow to maximise both human welfare and natural biodiversity. He wanted to come up with a way of ranking conservation projects; how to weigh what the Lord called creeping things of the Earth against one another given the limited amount of funding to keep them all alive.Animals have two sources of value in Weitzman’s model. The first is the utility they provide humanity: economists now call this “ecosystem services”. They vary from the delight that megafauna provide those visiting a safari park to the more prosaic: pollinators fertilising crops; earthworms keeping the soil healthy. A forthcoming paper by Eyal Frank of the University of Chicago and Anant Sudarshan of the University of Warwick looks at the economic benefits of “keystone species”. They find that the accidental poisoning of vultures in India led to a dramatic increase in human mortality, with more than 100,000 additional deaths in an average year, as the birds no longer devoured waterway-poisoning carrion (see Graphic detail). Despite their poor reputation, vultures might therefore earn a place on a resource-constrained ark.The second part of the calculation places a direct value on biodiversity. Imagine, now, that you are not Noah trying to save the natural world from a flood, but a scholar trying to save texts from the Library of Alexandria. All the scrolls might be valuable, but many have information on them that is in other libraries. The aim would be to save those with information not recorded elsewhere. Weitzman applies the same logic to animals: biodiversity has both an aesthetic value and an informational one, with content embedded in the genetics of animals. The selection for the ark should try to preserve as much of this information as possible, even if the animals themselves do not do much for human welfare.That led to what some conservationists might consider a repugnant conclusion: counterintuintively, the best way to preserve biodiversity is for the resource-constrained ark to pick a single species and squeeze in as many as possible. Preventing just one type of animal from going extinct preserves not only what is distinct about that animal, but everything it shares genetically with every other animal as well. Trying to keep two species alive, and failing, means losing everything. The real-world implication of this is that using conservation funds on highly endangered species risks throwing good money after bad. Pandas, for instance, are cute but require a lot of effort to keep alive. Noah might be best to fill the ark with resilient cockroaches instead, ensuring that at least one creature makes it through the flood.To reach that counterintuitive conclusion, Weitzman assumed that people ought to value biodiversity for its own sake. Some boatbuilders might instead want to focus only on the benefits animals provide to humans. Perhaps a few creatures provide a sufficiently low or even negative value as to be excluded altogether. Stinging wasps are one candidate, but the picnic irritants play a vital role, eating other pests and pollinating flowers. Mosquitoes, humans’ greatest natural killer, responsible for more than half a million deaths a year, are another. Some scientists have suggested releasing genetically modified, sterilised versions of the insects that would get rid of the species altogether; others warn that doing so could have unforeseen consequences by eradicating both a pollinator and a food source for other animals.Deliberate eradications are occasionally successful. Every week the us Department of Agriculture (usda) and Panamanian government drop sterilised screwworms, a parasitic flesh-eating fly larva that feeds on livestock, out of a plane on the Panama-Colombia border in order to stop the creatures from breeding. This helps maintain a biological barrier that prevents the creature from moving northward, and thus safeguards a programme spanning decades and countries that has got rid of the fly from North America. The usda estimates that the project produces economic benefits worth around $3.1bn a year.Be fruitful and multiplyThere is reason to be careful, though. Even when valuing animals solely on their benefits to humanity, biodiversity still has something to offer: insurance. Genetic range reduces the vulnerability of any individual part of an ecosystem to pests and diseases, helping avoid catastrophe if a species vital for human survival goes extinct. Were Noah to have filled his ark with cockroaches—or pandas, for that matter—a single virus could have wiped out the lot.Weitzmann himself applied such an approach to climate change, formulating his “dismal theorem”, which states that, in the presence of sufficiently big risks with a small chance of great harm, regular cost-benefit analysis is of little use. The same may be true of biodiversity. Deliberate extinctions are irreversible and reduce humanity’s options, so should be used sparingly. Playing at being Noah is one thing, playing at being God quite another. ■Read more from Free exchange, our column on economics:Democracy and the price of a vote (Aug 17th)Elon Musk’s plans could hinder Twitternomics (Aug 7th)Deflation is curbing China’s economic rise (Jul 27th) More

The Argentine economy hangs by a thread. So far this year, the peso’s black-market value has fallen by half against the dollar and annual inflation has hit 113%. The only foreign-currency reserves left are lent by China. Policymakers are torn between printing pesos to cover the government’s bills and the need to avoid hyperinflation. Ahead of presidential elections in October, much is riding on the candidates’ proposed fixes. Javier Milei, a libertarian economist who once smashed a model of the central bank on live tv, and who unexpectedly prevailed in recent electoral primaries, would scrap the peso and make the American dollar Argentina’s legal tender.Yet the economy may implode before any candidate gets to fix it. On August 23rd the government persuaded the imf to release a $7.5bn tranche of its bail-out programme, its only hope of meeting dollar-debt repayments and staving off default. The imf’s reluctance stemmed not from the fact Argentina is broke—lending to such countries is the fund’s purpose—but from the fact that most of the cash Argentina must repay this year is promised to the fund itself. Argentina is a rare country with the imf as its biggest creditor, owing the fund a cool $40bn, roughly a third of its external debt. By providing support, the imf has delayed disaster. It has also prolonged an increasingly absurd situation.The imf lends to the world’s unstable economies as a “preferred creditor”. If a country only has a little cash, it is the first to be repaid. It never takes a loss during debt restructuring. This lets it and other multilateral institutions, including the World Bank, hand out cheaper rescue packages. The approach has worked when packages are small enough that even troubled countries are able to repay them.Yet Argentina is pushing the model to its breaking point. In 2018 the imf took a gamble and offered the country a bail-out worth $57bn, the fund’s biggest ever. At the time, many observers thought it was too much for a country with Argentina’s patchy track record. It turned out also to be far too little to fix the country’s economy.Argentina cannot afford its bills; the imf cannot cut the debt it is owed without forfeiting its status as preferred creditor. The result is a stalemate. For now, an instrument approved by the imf last year provides a workaround. Every time the fund collects Argentine debts it deposits a roughly equal amount with Argentina’s government. This programme has an elongated repayment schedule, but also eye-watering interest bills of 8%. Argentina has just as much borrowing—and just as few ways to pay—as it did before.One escape for Argentina would be to find the cash to repay the imf. During 60 years of borrowing from the fund, however, the country’s politicians have shown little interest in taking its advice. Few reforms stipulated as part of the agreement in 2018 have been enacted. Even if the next president is disciplined, it will take years to get the economy on track. imf officials point to the country’s recent bad luck, including a drought that cost an estimated $20bn. But that would have barely covered repayments to the fund for the year.Another option is for the imf to admit that Argentina has too much debt and things will have to change. Although the fund reckons that Argentina is just about solvent, with a bit of luck, many outside economists think the country is already unable to repay its debts without restructuring. It is unlikely other creditors, mostly American financial institutions, will agree to take losses while the fund shelters behind its elevated status, since the more obligations Argentina racks up to multilateral institutions, the less its bondholders matter. Soon private-sector lenders could hold so little of the country’s external debt that they are irrelevant for its solvency.The imf’s preferred-creditor status ultimately rests on the expectation that borrowers will turn their fortunes around and on other creditors’ goodwill. Neither condition holds in Argentina. By doling out another wodge of cash, the fund will reassure markets, stopping sudden fluxes in the peso or bond prices. But the disbursement brings a tough question. When does the imf stop handing out money? Through their desperation to avoid default, the fund’s officials are putting up with naked disobedience from Argentina, which may set a bad example for other countries.Meanwhile, Argentina desperately needs a lasting fix. Each month without one deepens the country’s economic woes. Inflation worsens as imports become more expensive and monetary policy flirts with fiscal dominance, where the government borrows so much the central bank has no choice but to bail it out. The longer Argentina limps on without restructuring, the more damaging the process will be when it happens. In the past three months, Argentina has racked up short-term debts of $1.7bn from China, $1.3bn from caf, a regional lender, and $775m from Qatar.These are steep costs to protect the imf’s preferred-creditor status. The alternative would be for the fund to stop lending to Argentina, which would force the country to restructure its debts. In doing so, the fund would risk default and perhaps even a loss. Those in favour of such a move argue that the damage to the imf’s preferred-creditor status would not affect its dealings with other countries, so long as it did not make a habit of big bail-outs.With the next disbursement due in November, imf officials might even be able to use the threat of this action to squeeze real reforms from the outgoing government. If the move fails, the next government would at least receive a clean slate, rather than being dogged by negotiations during its first year in office. The cost of letting Argentina carrying on is high. In the coming months, the imf will have to figure out if the cost of cutting it off is higher. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

The headlines keep getting worse for China. Consumer prices are falling. America is shunning exports from the country and restricting investment in it. China’s trade with its best customer and biggest rival shrank by a fifth in July compared with a year earlier. The country’s property sector, which has driven more than 20% of its gdp in recent years, is teetering. Developers, which carry debts worth about 16% of gdp, are struggling to meet their obligations. Two of them, Country Garden and Sino-Ocean, have missed bond payments. Investment products sold by Zhongrong Trust, which are probably exposed to property, have failed to pay out.These reports have been accompanied by even scarier metaphors. China’s economy is a “ticking time-bomb”, according to America’s President Joe Biden, because of its ageing workers and unemployed young. Others think it is suffering from “long covid” because of the private sector’s “immune response” to Xi Jinping’s meddlesome rule. Many worry that China faces “Japanification”—a combination of debt, deflation and demographic decline—in the long term and a “Lehman moment” in the more immediate future, as defaults cascade through the shadow-banking system.Even level-headed observers are shaken. The mood is the worst it has been for years, if not decades. The cause of this despondency is disputed—is it politics or property?—but the consequences are clear. It is inhibiting spending, which is depressing prices, profits and hiring, all of which only adds to the gloom. To break this cycle, the country’s confidence must be revived.Morale used to respond to a strong signal from China’s leaders, such as Deng Xiaoping’s “southern tour” of entrepreneurial cities in 1992, or Zhu Rongji’s vow to keep growth at 8% during the Asian financial crisis in 1998. But China today lacks a ruler with the requisite economic credibility. Officials will have to put their money where their mouth is, spending on infrastructure, pensions and the like. These tools should work—if they are used. The problem is that they entail a generosity that some in China’s leadership find distasteful. And they require a commitment to growth that seems to be lacking.It is a disorientating state of affairs. For 40 years Chinese officialdom’s commitment to growth was never much in doubt. When China began its reform era in 1978, gdp per person was only $2,000 at purchasing-power parity, which adjusts for differences in the cost of living. More than 70% of the country’s workforce toiled on farms. Almost 90% suffered in abject poverty. Only 12 firms were permitted to trade across borders. The millions who worked in state-owned factories were saddled with “obsolete and dysfunctional products”, according to Thomas Rawski of the University of Pittsburgh and his co-authors, such as “transformers that failed to keep out rainwater” and “sewing machines that leaked oil onto the fabric”.Market reforms meant managers “switched from politics to business”, as one of them put it. China’s gdp per person now exceeds $20,000, above the global average. The most wretched poverty has been eliminated. Those 12 trading firms have been succeeded by tens of millions of others, turning China into the world’s biggest exporter of goods by 2009, and perhaps its biggest exporter of cars this year. The country’s manufacturing gdp exceeds America’s and the European Union’s combined, churning out chips, ships and industrial sewing machines (60m leakless ones in the past ten years). In its combination of scale and speed, this economic revolution has no precedent.The transformation included a remaking of China’s urban landscape. From 2010 to 2020, the country added more than 140m units of housing to its cities, according to Morgan Stanley, a bank. In just three years, it produced enough cement to turn the whole of Britain into a car park. The amount of living space per person increased from a cramped 27 square metres (like the eastern half of Europe) to a more comfortable 35 (like the western half), according to calculations by Rosealea Yao of Gavekal Dragonomics, a research firm. Chinese residential property became one of the world’s largest asset classes, worth over $30trn by the end of 2019.China’s miracle is long over. Its economy has matured. Its workforce is shrinking. Fundamental demand for new property in China’s cities, driven by people’s aspirations for a first home or better digs, has passed its peak. For China’s leadership, the pursuit of prosperity must now compete with other goals. Mr Xi wants to break the West’s chokehold on vital technological inputs. He wants to keep finance tethered to the needs of the “real” economy, like a kite tied to a tree, according to an official think-tank. He frowns on the “disorderly expansion of capital” into social realms like education and child rearing. And he despises the mix of gumption and corruption that motivates many local cadres.The question now is whether the next phase is moderate or malign. China’s strict “zero-covid” policy played havoc with its economy last year. Thus hopes for this year were high. China’s reopening released pent-up demand for the goods and services it was hard to enjoy when a single infection could imprison an entire city block. It also cleared a backlog of export orders and allowed a flurry of home purchases in China’s more expensive cities. Some private-sector economists raised their growth forecasts for the year to a jaunty 6%.This bout of spending was, however, considerably briefer than hoped. And, crucially, it did not lift morale sufficiently to sustain a broader recovery of spending. In April consumer confidence fell back to last year’s lows, according to the National Bureau of Statistics, which promptly stopped releasing the figure (see chart 1). Foreign direct investment all but vanished in the second quarter, falling by 87% year-on-year to $4.9bn, as multinationals repatriated their earnings rather than reinvesting them. The Shanghai Composite, a benchmark stock index, is down by about 5% compared with a year ago, when the memory of Shanghai’s torturous lockdown was still fresh. Prices for existing properties in China’s 100 biggest cities have dropped by 14% compared with their 2021 peaks, according to Beike, a broker. In the smaller cities, where price information remains patchy, things are probably worse.An old trickMany economists now expect growth to meet the government’s target of “around 5%” only because the word “around” gives it some wriggle room. Slowing growth has also been accompanied by declining prices and a weaker currency. The combined effect could wipe trillions off the dollar value of China’s gdp. In the past four months, for example, Goldman Sachs, a bank, has slashed its forecast for this year and next by a combined $3trn (see chart 2).For some observers, there is little hope of improvement. Adam Posen of the Peterson Institute for International Economics, a think-tank, has suggested that China’s economy is suffering from something akin to “long covid”. Draconian and arbitrary lockdowns in 2020-22 ruptured people’s faith in Mr Xi’s meddlesome party. Households and entrepreneurs can no longer assume that the party will not bother them if they do not bother it, he argues. Therefore private investment is tentative, purchases of consumer durables are weak and bank deposits are unusually high, as people self-insure against an uncertain future.Confidence has also suffered as a result of the “regulatory storm” that struck after 2020, humbling China’s online platform companies, such as Alibaba and Meituan, and all but killing the ed-tech industry. The succession of crackdowns and lockdowns left the impression that the government was newly willing to sacrifice economic growth for other ends. Whereas Mr Zhu urged China to keep growth at 8%, Mr Xi insists that it must be “high-quality”, by his own evolving definition. For entrepreneurs, that requires an uncomfortable switch from business to politics.If Mr Posen is right, China is stuck. If spending is weak because households and entrepreneurs fear the party’s intrusive policymaking, their spirits will not revive until Mr Xi commits to self-restraint—a commitment that he cannot credibly make. Even if the setbacks of the past two years have chastened him, he cannot prove he will not change his mind again. The party lacks the power to limit its own power.Yet low confidence may have more mundane explanations. Households may be despondent because employment is insecure, wages are stagnant and assets, especially houses, are losing value. If so, morale should pick up if the job and housing markets improve. The animal spirits of private entrepreneurs should also revive if their sales regain momentum.It may, in fact, be property that is at the heart of the problem. In manufacturing, by contrast, private investment has been respectable, growing by 8% in June compared with a year earlier. Weak spending on consumer durables may also reflect property-market woes, which have depressed furniture and white-goods sales. Purchases of other consumer durables have shown more signs of life. Sales of cars surged in the first half of this year, helped by the exemption of electric vehicles from a 10% sales tax. China’s households are not so worried by their government that they will miss out on a bargain.The renewed weakness in China’s property market has certainly contributed to fears of deflation and default (see chart 3 ). The price of building materials fell by 5.6% in July compared with a year earlier, and the price of household appliances fell by 1.8%. The “deterioration in sales” was one reason Country Garden gave for failing to pay its bondholders on its deadline of August 6th. Property distress may also help explain why products sold by Zhongrong, an asset-management firm, have failed to pay investors as expected.If property is a bigger mood-killer than official interference, this raises a question. Are China’s property problems any easier to solve than those produced by an overbearing state? The market got ahead of itself in 2020 and 2021, buoyed by people looking for a place to park their wealth, rather than a place to live. Although the non-speculative, fundamental demand for new construction will remain on a gently declining path from its historical peak, demand is now so low it has probably fallen below this fundamental pace. Sales are running at about 54% of their 2019 level. A sustainable pace would be closer to 75%, reckons Ms Yao of Gavekal Dragonomics.Lifting sales back to such a level would require bolder macroeconomic manoeuvres from China’s policymakers. Lower interest rates would make new mortgages more affordable, although they would be of little immediate assistance to existing borrowers, since mortgage refinancing is difficult in China. The People’s Bank of China, the country’s central bank, this week surprised observers by deciding not to reduce the five-year loan-prime rate, which serves as a benchmark for mortgages. Given the drop in inflation in recent months, real interest rates are rising.The central bank’s response partly reflects uncertainty about the impact of interest-rate cuts. Officials worry, for example, about the profit margins of banks, which may feel obliged to pass on rate cuts in full to borrowers but not to depositors. The authorities also fret about the yuan. China’s capital controls give it a degree of monetary independence. But about $26bn of foreign exchange still left the country in July, according to Goldman Sachs—the fastest pace of outflows since September 2022. China’s currency has weakened more quickly than the central bank would like in recent weeks. There are signs that state-owned banks are helping to prop it up.Such constraints on monetary policy necessitate a more forceful fiscal push. During past slowdowns, local governments and affiliates have led the way, allowing the central government to keep its balance-sheet relatively uncluttered. But local stimulus efforts have included poorly conceived projects, which Mr Xi views with distaste. Some cadres “over-borrow for construction and blindly expand businesses”, he complained last year.Other provinces have been a little more imaginative. Three years ago, for example, cities in Zhejiang distributed perishable coupons to consumers through e-wallets on their mobile phones. These coupons offered discounts on things such as restaurant meals if shoppers spent above a certain threshold. A study by economists at the Ant Group Research Institute found that these vouchers had a high multiplier, delivering a lot of wallop for the yuan.The problem is that many of China’s local governments are in no position to stimulate the economy this year, imaginatively or otherwise. Indeed, they will need more help merely to prevent damaging spending cutbacks. According to Caixin, a business magazine, China’s central government will allow local governments to sell an extra 1.5trn yuan-worth ($210bn) of bonds, which carry an implicit central-government guarantee, to help repay the riskier, costlier debt owed by their financing vehicles (investment firms, backed by state assets, that can borrow in their own right). Proceeds from these bonds should help prevent an explicit default. Yet even 1.5trn yuan looks meagre compared with the total risky debt of these platforms, which one estimate suggests amounts to 12trn yuan.Although avoiding a default by a local-government financing vehicle will prevent the economic downturn getting worse, it will not reverse it. That would require the central government to make greater use of its own balance-sheet, through increased investment in green infrastructure, consumer giveaways of the kind pioneered in Zhejiang or increased spending on things such as pensions and anti-poverty programmes. Some economists have argued that the government should also establish a fund to buy up some of the unsold inventories of China’s struggling property developers in order to create affordable rental housing for the poor.Flaming outThe aim would be to prevent a fire-sale of properties by distressed developers, add to household incomes and replenish company order books. If used, stimulus should be enough to ward off deflation, cap unemployment and ensure China’s economy fulfils its potential over the next few years. Low inflation, after all, is both a threat and an invitation. It implies that the economy has plenty of “slack” or room to expand over the medium run, even if its growth potential is constrained in the longer term.But this comes with two mighty caveats. The first is that fiscal heroics will not erase the long-term problems that cloud China’s economic future. The country will still have to contend with demographic decline and diplomatic dangers. Its workforce will begin to shrink more rapidly in the 2030s (see chart 5). And America’s restrictions on semiconductor exports will bite more keenly as technology advances.The second concerns the political dynamics at play. If China’s government acts with urgency, it has the tools it requires in order to engineer a recovery in the latter part of this year. But will it use them? Mr Xi lacks the credibility or focus of previous leaders. He now prizes greatness over growth, security over efficiency and resilience over comfort. He wants to fortify the economy, not gratify consumers. These competing priorities may prevent China’s rulers from doing whatever it takes to revive demand. Mr Xi no longer wants growth at all costs. And so the country has not had it. At growing cost. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Beijing’s deteriorating economic fundamentals have become starkly apparent in recent months, with July’s data broadly missing expectations.
China’s headline consumer price index fell 0.3% year-on-year in July to register deflation for the first time in two years, presenting an opposing problem to that faced by major central banks in the West.
“Persistent deflation in China would likely spill over to developed markets, as a weaker yuan and an elevated inventory-to-sales ratios lower the cost of Chinese goods abroad,” said Pimco economists.

SHENZHEN, CHINA – MARCH 09: View of high commercial and residential buildings on March 9, 2016 in Shenzhen, China. General economic slowdown continues in China while the property price and stock bubble faces risk. (Photo by Zhong Zhi/Getty Images)
Zhong Zhi | Getty Images News | Getty Images

China’s economic challenges have given rise to deflationary pressures that present a global concern and are likely to accelerate in the coming quarters, according to economists.
Beijing’s deteriorating economic fundamentals have become starkly apparent in recent months, with July’s data broadly missing expectations and the National Bureau of Statistics suspending its publication of youth unemployment figures as numbers soared to record highs.

Credit data for July also showed a slump in borrowing demand from businesses and households and problems have persisted in the country’s massive real estate sector, with once-healthy developer Country Garden on the brink of default and heavily indebted property giant Evergrande Group filing for bankruptcy protection in the U.S. earlier this month.
China’s headline consumer price index fell 0.3% year-on-year in July to register deflation for the first time in more than two years, presenting an opposing problem to that faced by major economies in the West.
Though some of the headline weakness could be attributed to transitory factors such as lower energy and pork prices, core inflation has also been weighed down by falling prices in shelter and related categories due to the ailing property sector.
“Despite changing linkages between China and the global economy as Beijing tries to transition to a consumption-led growth model and trade tensions remain elevated with the West, China is still the world’s manufacturer,” said Pimco Economist and Managing Director Tiffany Wilding.
“As a result, Chinese economic weakness and falling prices (especially Chinese producer prices) are likely to spill over into global markets — near-term good news for the Western central banks’ fight against elevated inflation.”

While Western economies emerged from the Covid-19 pandemic with elevated inflation amid constrained supply and resurgent demand, China has not experienced the same dynamics since ending its strict zero-Covid measures, as its domestic manufacturing power helped mitigate supply bottlenecks and global commodity prices moderated.
Yet in a research note last week, Wilding and Pimco China Economist Carol Liao noted that domestic demand has since faltered and left China with idle capacity, while deleveraging in the property and local government financing sectors have deepened disinflationary pressures and hit domestic investment, leading to “broad-based excess capacity in manufacturing.”
“What’s more, the government’s reaction to these weakening fundamentals has been far from sufficient. Indeed, a government-led push to stimulate and stabilize growth through easy credit, especially to state-owned enterprises and for infrastructure investment, has not been enough to offset the drag from property market, as the flow of new credit to the economy has contracted over the past year,” the Pimco economists added.
China’s central bank on Friday ramped up measures to arrest a rapid depreciation in its currency on the back of the bleak round of data and fading consumer confidence, but the market seemingly remained unconvinced that Beijing was doing enough to reverse the recent trends.

Skylar Montgomery Koning, senior global macro strategist at TS Lombard, said in a research note last week that market disappointment is likely to continue as any government fiscal stimulus measures will be “stronger versions of current easing measures” rather than the “broad-based stimulus needed to revive confidence in prices.”
“China’s disappointing rebound is now feeding negatively into global sentiment and growth. This has been countered by a fairly benign global backdrop and a remarkably strong U.S. economy, but there is a fine balance for risk assets as significant dollar strength is detrimental, too,” Montgomery Koning said.
Though authorities in Beijing have attempted to push back against one-way depreciation bets against the Chinese yuan, she said the direction of travel is clear, and TS Lombard maintains a long position on the U.S. dollar against the yuan.
“Slower growth, limited stimulus, trade decline and capital outflows all point to further CNY weakness this quarter,” Montgomery Koning added.
Spillover effects: Imports and exports
Though China is recalibrating its economy to become less dependent on its traditional pillars of real estate and manufactured goods exports, Chinese manufactured products still dominate consumer goods markets, particularly in the U.S.
“According to U.S. Census Bureau data as of June, prices of goods imported from China are down 3% on average versus last year, while producer prices of consumer goods in China are down 5% in dollar terms,” Wilding and Liao noted.
“Importantly, these declines are being passed on to U.S. consumers; July marked the first time since the early days of the pandemic that U.S. consumer retail goods prices declined on a three-month annualized basis.”
This moderation dynamic is likely to transmit to other developed markets as U.S. inflationary trends have typically led the way since the pandemic, they suggested.

Secondly, exports have weakened in China in recent months. As downside risks to Chinese economic growth materialize, Wilding and Liao suggested Beijing may look to use fiscal policy to boost exports and address an emerging domestic oversupply problem, in turn flooding the global market with cheap consumer goods.
“This already appears to be happening in Germany, as Chinese exports of lower-cost electric vehicles have recently surged, while domestic price cuts may spill over into other countries,” they added.
Beyond the trade-related spillovers, a common global disinflationary pressure comes from commodity prices, where as a huge importer of commodities, Chinese domestic demand remains a key factor.
“Weak Chinese domestic investment and broad-based excess capacity in manufacturing, as well as weak sales of new homes and land, are likely to continue to depress global commodity demand,” Wilding and Liao said.
This was echoed by TS Lombard’s Montgomery Koning, who also noted that Beijing’s stimulus measures during this cycle have been consumer-driven, rather than investment-driven, meaning “renewed demand for industrial commodities has undershot expectations.”

“Deteriorating Chinese economic fundamentals have produced deflationary pressures that are already moderating inflation both in China and in the global markets served by Chinese goods,” Pimco’s Wilding and Liao concluded.
“Given the usual lags, deflationary spillovers have likely only just begun to impact global consumer markets, with discounting likely to accelerate over the coming quarters.”
The risk of more prolonged and pronounced inflationary pressure hinges on the government’s fiscal policy responses in the coming months, they added, arguing that adequate stimulus to boost domestic demand may re-accelerate inflation while inadequate policy measures could give way to a “downward spiral.”
“Persistent deflation in China would likely spill over to developed markets, as a weaker yuan and an elevated inventory-to-sales ratios lower the cost of Chinese goods abroad – a development central bankers in developed markets would likely welcome,” they added.
Uncertainty over China’s recovery potential has cast a dark cloud over global markets in recent weeks, and Deutsche Bank strategists Maximilian Uleer and Carolin Raab said in a research note Wednesday that the central bank’s rate cuts and the government’s promise of further fiscal stimulus have done little to soothe concerns in Europe.
“European companies are heavily dependent on Chinese demand and generate about 10% of their profits in China,” they highlighted.
“We still believe that a stabilization of the Chinese economy in the fourth quarter is likely. ‘Likely’ is unfortunately not enough. We wait for data to improve before we turn positive on markets again.” More

Nvidia headquarters in Santa Clara, California, June 5, 2023.
Marlena Sloss | Bloomberg | Getty Images

Check out the companies making headlines in extended trading.
Splunk — Shares added 11% after an earnings beat. Splunk earned 71 cents per share, after adjustments, on $889 million in revenue. Analysts polled by FactSet had forecast Splunk would earn 46 cents per share. The company also raised its forecast.

Nvidia — The chip stock added nearly 9% after reporting second-quarter results. Nvidia earned $2.70 per share, excluding items, on $13.51 billion in revenue, while analysts polled by Refinitiv forecast $2.09 per share in earnings and $11.22 billion in revenue.
Snowflake — Shares added nearly 3% after beating earnings expectations. Snowflake reported a profit of 22 cents per share on an adjusted basis on $674 million in revenue. Analysts polled by Refinitiv forecast 10 cents per share in profit on $662 million in revenue.
Taiwan Semiconductor, AMD, Marvell — Semiconductor stocks were higher after Nvidia reported a second-quarter earnings beat. Taiwan Semiconductor added 3%, while AMD and Marvell gained 3.9% and 5.3%, respectively.
Guess — The fashion stock surged nearly 19% after Guess reported it had earned 72 cents per share, excluding items, on $664.5 million in revenue in the latest quarter.
Super Micro Computer — Shares climbed 8.4% following Nvidia’s earnings beat. Loop Capital reiterated a buy rating on Super Micro Computer stock earlier Wednesday, with analyst Ananda Baruah saying Nvidia’s earnings could boost the stock if the report surpasses estimates.
Autodesk — The software stock climbed 5% after reporting second-quarter results. Autodesk earned $1.91 per share after adjustments on $1.35 billion in revenue, while analysts polled by Refinitiv predicted $1.73 per share in earnings and $1.32 billion in revenue. More

The energizer bunny, a pink mechanical hare that keeps banging its drum owing to long-lasting batteries, will celebrate its 35th anniversary this October. As if to mark the momentous occasion, the American economy is doing its best imitation of the advertising icon. Despite umpteen predictions of a slowdown, it keeps going and going. Recent data suggest it may even be on track for annualised growth of nearly 6% in the third quarter, a pace it has hit only a few times since 2000.As has been the case repeatedly over the past year, a steady stream of better-than-expected data has left analysts scrambling to lift their forecasts. New orders for manufacturing firms reached their highest in nine months in July. Retail sales were perky last month, too, with consumers splurging on everything from restaurant meals to online shopping and clothing to sporting goods. The construction industry has also been buoyant, supported by a rebound in homebuilding. Underpinning all this is the labour market, which has remained hot, making it relatively easy for people to find work at decent wages. The total number of jobs in America has been growing faster than the working-age population, helping to keep the unemployment rate at 3.5%, just shy of a five-decade low.The worry is that such strong growth, veering into overheating, will also beget a long-lasting inflation problem. Added up, America is on track for a gdp figure this quarter that may look more like a “no landing” than the “soft landing” expected a short while ago. The Federal Reserve’s branch in Atlanta uses a range of data points to estimate gdp growth in real time: a technique known as nowcasting, rather than forecasting, because it assigns weights to already observed variables without factoring in expectations for future figures. On August 16th, its last update, the model showed that the economy may expand by 5.8% in the third quarter. That would be a shocker after more than a year of aggressive interest rate hikes by the Fed.Could growth really be that strong? The nowcast almost certainly exaggerates the economy’s vigour. It is normally off by about two percentage points at this point in the quarterly cycle (see chart). One factor this time is likely to be inventories. When firms make sales from their stocks rather than by producing new goods, this drawdown counts as a subtraction from gdp. A recent gap between rising retail sales and declining wholesale transactions suggests that such a drawdown is now taking place and will weigh on growth, according to Andrew Hunter of Capital Economics, a consultancy. Still, even if somewhat exaggerated, the Atlanta Fed’s nowcast is almost always directionally correct. The inference is clear: America’s economy is not just holding up but steaming ahead.The past couple of months have offered some respite on the inflation front. Core prices, which strip out volatile food and energy costs, have risen at their slowest pace in more than two years. But if the economy continues to heat up, inflation may well stage a rebound. Andrew Hollenhorst of Citigroup, a bank, warns that shortages of both workers and housing risk a significant reacceleration of prices next year. Where once optimists thought that inflation might be transitory, now pessimists fear that disinflation will be fleeting, which would scupper hopes for a pivot to monetary loosening by the Fed.The strength of the American economy may also add to financial strains. It is the principal factor explaining why investors have sold off government bonds since May. Yields, which move inversely to prices, have risen by about one percentage point during that time, with long-term Treasury yields climbing to 16-year highs. This has prompted a debate about whether America’s neutral short-term interest rate—where the Fed would set rates to neither stifle nor stimulate growth—has drifted up. Bill Dudley, a former Fed official, has argued that in the long run America may need higher rates to balance the need for more borrowing (implied by higher government deficits) and a smaller funding pool (as retirees spend their savings). A gathering of central bankers in Jackson Hole, Wyoming, taking place after we go to press, was expected to discuss such issues.Wall Street is now convinced that in the short run the Fed will need to keep rates higher than anticipated, too. A few months ago most were pricing in rapid rate cuts starting in September; now most think the Fed will wait until May and will move tepidly. Given the economy’s continuous outperformance, pricing in higher rates further into the future seems prudent.Higher yields are contributing to an increase in funding costs for financial institutions, which are a headache for smaller lenders in particular. Moody’s and s&p, two credit-rating agencies, downgraded a spate of banks this month, a reminder of the continued fragility of the financial sector. Higher borrowing costs are also starting to bite for consumers. Delinquencies on credit cards and car loans have started to increase sharply. Finally, higher rates are clouding the outlook for housing. Like the wider economy, the market has been most notable for its resilience to date. But mortgage rates have jumped over the past couple of months and hit 7.5% this week, their highest since 2001. This is already having a dampening effect on existing home sales, which could spread to homebuilding and construction more generally.The lesson of recent history is that the American economy inevitably blows through such problems. Nothing lasts for ever, though. The higher yields rise, the greater the challenge. In the advertisements the Energizer Bunny’s batteries never fade. In real life even the strongest batteries are drained eventually—or unceremoniously yanked out. ■ More

Nvidia headquarters in Santa Clara, California, Feb. 23, 2021.
David Paul Morris | Bloomberg | Getty Images

Check out the companies making headlines in midday trading.
Nvidia — The chipmaker climbed 3,2% ahead of its quarterly report set for release after the bell. Expectations are high for the chipmaker after its shockingly positive forecast in the prior quarter. Nvidia has been one of the biggest winners on the back of the artificial intelligence boom with shares rising nearly 220% this year.

Peloton — The fitness company shed 22.6% after reporting a wider-than-expected loss for its fiscal fourth quarter and a drop in new subscribers as it grapples with the recent recall of its bike. Peloton reported a loss of 68 cents per share, versus the 38 cent loss per share expected by analysts polled by Refinitiv. Revenue came in slightly ahead of expectations.
Foot Locker — The athletic retailer plunged 28.3% after cutting its outlook again for the year and suspending its quarterly dividend. Earnings came in line with expectations, while revenue missed.
Dick’s Sporting Goods — The sports retailer slipped 0.3%. On Tuesday, the company posted weaker-than-expected earnings and cut its outlook for the year. The stock is coming off its worst day ever, losing 24% in the previous session.
Abercrombie & Fitch — The retailer rallied 23.5% to a new 52-week high. Abercrombie easily beat analysts’ expectations for the previous quarter and raised its full-year outlook.
Apellis Pharmaceuticals — Shares soared 30.2% following the release of Syfovre, a drug used to treat degenerative eye disease. The company said there’s no direct cause between a side effect and a particular needle used for the drug, though practitioners could use a different needle.

Nike — Shares slid 2.7%, extending its longest losing streak ever to 10 sessions.
Urban Outfitters — The retailer added 3.1% after posting better-than-expected quarterly results. Earnings came in at $1.10 per share against a consensus estimate of 89 cents from analysts polled by Refinitiv. Revenue also beat expectations at $1.27 billion compared with a forecast of $1.25 billion.
La-Z-Boy — The furniture maker dropped 0.5% after management said furniture sales should remain challenged. Elsewhere, the company beat expectations on both lines in its first fiscal quarter.
Charles Schwab — Shares of the financial company rose 2.8% as Charles Schwab looked to snap an 11-day losing streak, including a loss of nearly 5% Tuesday. Charles Schwab announced a debt raise of more than $2 billion Tuesday.
Netflix — Shares climbed 3.5% after Oppenheimer reiterated the streaming giant’s outperform rating, noting that there’s a path back to double-digit revenue growth.
Brown-Forman — Shares of the spirits company gained 3.6% following a double-upgrade from Morgan Stanley. The firm cited improving growth margins as agave prices ease.
Meta — Shares of the tech firm gained 2.3% after Bank of America reiterated its buy rating on the stock. The Wall Street firm said the stock could see “renewed enthusiasm on 2024 upside potential.”
Avery Dennison — The adhesives company climbed 3% following an upgrade to buy from neutral from UBS. The firm said the company could see an earnings inflection point ahead.
Louisiana-Pacific — The building materials stock advanced 3.7% following DA Davidson’s upgrade to buy from neutral. DA Davidson said recent weakness has created a compelling entry point for investors.
Safehold — The real estate investment trust added 1.8% after Goldman Sachs initiated coverage with a buy rating. Goldman Sachs cited a rise in restructuring activity in the near term and for investment volumes to gradually rise in the coming quarters.
Marvell Technology — The semiconductor maker added 3.2% after announcing a coherent digital signal processor for pluggable modules called Orion. The firm said it’s an industry first that will support transport networks for carrier and cloud assets. Elsewhere, Susquehanna reiterated its positive outlook on the stock ahead of its earnings report Thursday.
Advance Auto Parts — Advance Auto Parts rose 3.1% after beating analysts’ revenue expectations for its second quarter. The auto retail company reported revenue of $2.69 billion, greater than the consensus estimate of $2.66 billion, according to Refinitiv. Earnings were lower at $1.43 per share, instead of the $1.66 per share consensus estimate. Separately, the auto parts company also announced Shane O’Kelly was appointed president and CEO, effective September.
— CNBC’s Hakyung Kim, Samantha Subin, Yun Li, Sarah Min and Jesse Pound contributed reporting. More

87% of Gen Z investors bought or sold stock, or withheld additional investment, in 2023 due to high interest rates and inflation, according to Bankrate.
Trading stock based on emotion and not logic typically leads to bad financial decisions, experts said.
However, buying and holding stock may serve young investors well.

Nosystem Images | E+ | Getty Images

Almost 9 in 10 young investors have actively traded stocks this year due to higher interest rates and inflation, according to a new Bankrate survey. And that behavior may cost them in the long run, experts said.
“If younger investors trade in and out of the market, that’s almost guaranteed to underperform,” said James Royal, a Bankrate analyst who conducted the research.

The Federal Reserve started raising interest rates aggressively in March 2022 to rein in persistently high inflation. Borrowing costs are now at their highest level in more than 22 years, though inflation has declined substantially since hitting a pandemic-era peak in June 2022.
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U.S. stocks posted their worst showing since 2008 against that economic backdrop last year. But higher interest rates also meant better rates on savings accounts like high-yield ones offered by online banks.
The S&P 500 stock index has rebounded in 2023 and is up 14% year-to-date.
Eighty-seven percent of Generation Z investors have responded to higher interest rates and inflation by buying or selling stocks, or by withholding additional investment, according to Bankrate.

That share “substantially” exceeds the 52% average among American investors of all ages, Royal said.

The Gen Z group includes anyone aged 18 to 26 with stocks or a related account like a 401(k) plan.
“Gen Z — and, in part, millennials — have never seen a period of high interest rates, nor a period of high inflation,” said certified financial planner Ted Jenkin, founder and CEO of oXYGen Financial based in Atlanta.
However, allowing emotions rather than logic to guide investment decisions generally leads investors to make “a bad financial decision,” said Jenkin, who is a member of CNBC’s Advisor Council.
Jumping in and out of market generally leads investors to miss the market’s biggest days and can also lead to a bigger tax bill for investors, Royal said.
A Bank of America historical analysis of the S&P 500 shows that investors who missed the market’s 10 best days per decade would have a total return of 28% between 1930 and 2020. By comparison, investors who held steady would have a return of 17,715%.   

“You simply don’t want to be timing the market,” Royal said.
Young investors were also the most likely to buy instead of sell stock, relative to other ages, Bankrate found. This may serve young investors well if they hold their investment for at least five years, Jenkin said.
Investors can use a rule of thumb known as the “rule of 120” to determine a rough age-appropriate stock allocation in your portfolio, he said. This entails subtracting your age from 120 — meaning most Gen Z investors will have a portfolio that’s about 90% or more in stocks, he said.
Investors would also likely be better served by buying mutual or exchange-traded funds that track a market index like the S&P 500 – known as “passive” investing – rather than buying a fund that actively trades to try beating the market, Royal said. More