Can China Spend Its Way out of Trade War?

Does U.S. Have the Upper Hand in Trade War? A Consensus is Emerging

In case you didn’t notice, China gave emerging markets and commodities a shot in the arm yesterday by announcing a series of stimulus measures.

What’s going on? Why’s the world’s second-largest economy turning to Keynesianism at a time when the U.S. is enjoying some of its best growth of the decade? In case you haven’t been watching our Market Action webinar, here’s a breakdown of some developments we’ve been monitoring:

  • May 15: China’s fixed-asset investment misses estimates.
  • June 14: Deja vu all over again, but this time industrial production lagged as well.
  • July 2: A late-night Reuters story quoting anonymous currency traders said state-controlled banks were selling the U.S. dollar to prop up the yuan.
  • July 10: China does nothing in response to U.S. potential tariffs on $200 billion of additional merchandises. Around the same time, bigwigs like Mohammed el-Erian and Mark Mobius predict China will lose the trade war against President Trump.
  • July 13: Night owls spot more wire stories about China planning to boost government spending.
  • July 19: Chinese yuan hits new 52-week low against the greenback.
  • July 23: China injects record amounts of liquidity into its banking system.
  • July 24: Beijing officially announces stimulus. Separately, Reuters compiles a credit reports on the worsening balance sheets of smaller Chinese banks.

In a nutshell: Trump’s rhetoric on trade has demoralized China’s massive factory sector. That, in turn, is hurting investment, which in turn is hurting growth. Suddenly all those bad loans people have watched nervously for years are beginning to stink like rotten fish-heads.

I am not an expert and am not predicting a hard landing. After all, there could be some more relief if Beijing makes nice with the White House.

But investors should always be careful they see the dangerous combination of bad debt and slowing growth. Some folks may also remember how “liquidity injections” and “stimulus” triggered bear-market rallies in stocks like Lehman Brothers and Bear Stearns amid their slide into nothingness 10 years ago. Again, it’s not to say the cases are comparable. But folks should remember that debt crises can happen. The good news is that they can produce some some very tradeable periods of volatility. Keep reading Market Insights for more!

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.