China is cutting rates again in an effort to bolster the local economy which has slowed due to COVID lockdowns and the bursting of the local property bubble. We touch on a few near-term implications of this slowdown. More importantly, from a strategic perspective China’s easing will likely result in the U.S. expanding its trade deficit with China.
The U.S. and global economy have felt this slowdown and will continue to feel it.
The price of oil will continue to slide in the near-term (a positive);
Less demand for U.S. goods & services as fewer Chinese travel and purchase abroad. Think of the residential real estate market across New York, San Francisco, London and other markets;
Less demand for U.S Treasuries as Beijing deploys more capital locally, meaning upward pressure on Treasury yields;
Less demand for U.S. goods in local markets as Chinese have found it difficult to access capital (U.S. automobile purchases in Beijing and Shanghai come to mind);
More importantly, longer-term, China’s easing will make it increasingly difficult for the U.S. to bring back various manufacturing processes as China’s RMB devalues versus the USD. We believe that the U.S. will source more goods from China over time, not less. YTD The U.S. trade deficit with China is on track to outpace 2021’s $354 billion deficit (HERE).