Mainstream headlines are now talking about China’s deflation problem and what it means for the rest of the world. While we’ve been talking about this for months, the difference now is that capital markets are now being forced to price in that China will likely try to export its way to growth, and therefore export deflation and lower global interest rates.
At the extreme, China’s slowing economy will also drag down growth rates across the rest of the world, but as this will only exacerbate falling interest rates, this doesn’t really change our conclusion: Right now, BBB/BB corporate bonds are a great substitute for higher growth investments such as equities.
See here for IAM’s initial research on this topic.
What’s new?
China held its “National People’s Congress” yesterday and reaffirmed its 5% economic growth target for 2024. At the same time, China’s manufacturing inflation index produced its highest deflationary measure since 2009.
This 5% growth target will be very hard to achieve given the existing real estate sector woes and high debt commitments. Beijing understands this, and so it is very likely that they will plan to support exports to de-risk this target. Supporting exports and lower domestic Chinese demand will mean higher exports of manufactured exports, which means that they will be exporting deflation. This means tougher conditions for manufacturers around the world, but more importantly, it means that inflation and interest rates will fall faster than markets expect.
China can still manage to avoid a Japan-like deflation-debt trap scenario, but the odds of them doing this are falling sharply. Markets are now starting to price in falling rates globally, so the time to make changes ready for this global shift is now.
Alternatively, if you don’t believe that China will have this global impact, get ready to take the other side of this trade. As always, IAM is all about active investing, and so we don’t share these insights to have everyone blindly follow!
To join our mailing list and receive these updates via email on a weekly basis, please complete the following form:
