China’s economy may continue to douse the inflation fire

Global Economic Update, 10 August 2023: Last year, China attempted to re-open its economy after years of pandemic restrictions, and many investors became worried that the attempt would add fuel to the global inflation fire.

• Main U.S. indexes green, but off highs: Nasdaq up ~0.7%
• All S&P 500 sectors advance: cons disc leads
• Euro STOXX 600 index up ~1%
• Dollar, bitcoin, crude decline; gold edges up
• U.S. 10-Year Treasury yield edges down to ~4.01%

That didn’t prove to be the case, and as Brian Reynolds, chief markets strategist at Reynolds Strategy, sees it, the most recent data also indicates that China’s situation is likely to lead to even lower inflation.

According to Reynolds, the recent drop in China’s exports is even worse than it seems because this is the time of year when exports to the West typically jump as retailers ramp up for the year-end holidays.

Additionally, he says China’s manufacturing firms are finally accepting just how much of a global glut of goods there is, and are curbing output, which should result in even more downward pressure on inflation.

Reynolds also notes that if the manufacturing downturn continues in China, margin calls on underwater metals’ trades could lead to significantly lower metals prices and, and in turn, put further downward pressure on inflation.

“For nearly two years, we have highlighted that the shortage of goods, partly caused by ships sitting at anchor off the U.S. West Coast, would turn into a glut, bringing inflation back down as the extent of double- and triple-ordering became clear.”

Reynolds’ bottom line is that, “Those forces are still intact and argue for lower inflation in 2024 and perhaps beyond.”

Meanwhile, other analysts and market players are also weighing in on the China situation.

“China’s deflation concerns could turn out to be good news for global disinflation,” J.P.Morgan economists wrote in a note, noting that declines in China’s export prices have benefited the country’s key trading partners.

Dan Boardman-Weston, chief executive officer at BRI Wealth Management, also notes that if China is now exporting deflation then that should be good for the inflation issue that a lot of Western countries are facing.

“What we’ve not really seen yet is a huge amount of stimulus from the authorities that will maybe start to come through in a quicker or more meaningful way,” said Boardman-Weston.

Blackstone BX on Thursday said it had raised $7.1 billion for its latest private credit fund focused on energy transition companies.

The fundraise comes at a time when several entities worldwide have launched a fierce backlash against what they view as an outsized influence of environmental, social and governance (ESG) factors in policymaking and investment decisions.

A Republican-led backlash in the U.S. has engulfed major Wall Street firms like BlackRock BLK. In Europe, citizens struggling with a cost-of-living crisis are resisting attempts by policymakers looking to expand their net-zero ambitions.

Still, climate reduction goals and other sustainability metrics remain an important element of investors’ playbook. In the three months ended June, ESG-focused funds welcomed $18 billion of new money even as investment vehicles overall saw $37 billion of outflows, according to research from Morningstar Direct.

Blackstone’s latest fund, Blackstone Green Private Credit Fund III, falls under the sustainable resources arm of the asset manager’s credit business.

The sustainable resources platform provide private credit to renewable energy, infrastructure and energy transition companies.

Asset managers are also doubling down on their private credit business, to fill the void left by regional banks which have been tightening lending standards to preserve capital.