July 10, 2013 | By Scott Minerd
The macroeconomic outlook for China continues to deteriorate. Premier Li Keqiang’s program to hold banks accountable for their reckless lending practices is having a number of unintended consequences, including an elevated risk of a financial crisis over the next six months. Importantly, the line of reasoning being followed by Chinese monetary authorities is exactly that which the U.S. government adhered to in 2008 when it decided not to prevent the collapse of Lehman Brothers. I view the probability of a parallel outcome in China as around 10 percent right now. Although it is not the base case scenario, the possibility of an unintended financial crisis in China is gravely concerning given the severity of the potential consequences.
Chinese officials have shown that they are willing to tolerate a lower growth rate than originally anticipated as they attempt to reduce the moral hazard in the financial system. This, combined with instability in Japan as Abenomics continues, puts all of Asia in a precarious situation. If the bad news becomes worse and volatility rises further, there will inevitably be greater knock-on effects for the global economy and markets. We could see a return to safe-haven U.S. Treasury buying, which would push down interest rates in the United States.
China’s economic growth will likely continue to slow in the near-term, given the chaos in the banking system and the potential squeeze of credit to the real economy. Economic growth in other emerging markets is likely to be severely hit if demand from China falters. Measuring by export exposure to China, Asia-Pacific countries and those driven by commodity exports are most vulnerable to a slowdown in China. By comparison, the direct impact on most advanced economies appears to be moderate, as their exports to China account for a much smaller share of GDP.
Source: Haver Analytics, Guggenheim Investments. Data is annual trade data as of 12/31/2012.
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.
Risk assets will likely enjoy another rally while the Fed stays on hold, but the pause will only allow excesses to become more pronounced.
Should the mood this year at Davos prove once again to be a contra-indicator, this may be the signal that the economy is likely to re-accelerate soon and that the party in risk assets continues.
What would be a normal seasonal correction is turning into the worst December selloff in equities since the Great Depression.
Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”
Anne Walsh, Chief Investment Officer for Fixed Income, shares insights on the fixed-income market and explains the Guggenheim approach to solving the Core Conundrum.
You are now leaving this website.Guggenheim assumes no responsibility of the content or its accuracy.
Your browser does not support iframes.
2019 Guggenheim Partners, LLC. All rights reserved. Guggenheim, Guggenheim Partners and Innovative Solutions. Enduring Values. are registered trademarks of Guggenheim Capital, LLC.