The Kotecha mythHead of Forex & EM Macro Strategy Asia, BarclaysAccording to rising dollar and US yields, money is likely to move out of other parts of the world. It is not clear whether that money will flow from China to India, even though we have already noticed a significant exodus of foreign investors from India. Some concerns from India include a slowdown in growth and uncertainty surrounding the central bank and the possibility of a new governor after Shaktikanta Das retires on December 10, 2024. Moreover, it is not just India that could feel the pressure; China and other emerging markets may also experience outflows.
We were just alluding to India-China trade, and with all that going on, like US interest rates, Fed inflation cap, what’s the outlook for China trade?
The Kotecha Myth: As you said in your previous conversation, there was optimism about the stimulus measures in China and we saw that with a big rebound in the stock markets. But the reality of the situation is that the incentives have been disappointing, as we saw recently at the NPC meeting and everything we saw. what I really saw was a net debt swap of 6 trillion yuan. We have not seen anything in the real estate sector. We haven’t seen anything in terms of giving money to consumers and it’s likely that the Chinese authorities are keeping their powder dry and waiting to see what the new Trump administration will look like and what the tariffs will look like. Even though we know Trump has talked about 60%, will we get to 60%? The US economy is still very resilient and with the dollar remaining very strong, some of that optimism is clearly disappearing. And as you pointed out, this may also have an impact on the redistribution shift from Indian to Chinese stock markets. So we see that with the CNY the Chinese currency is coming under pressure amid the strong dollar. So now we wait for the December working conference in China. Next March we will also hold the March meeting of the National People’s Congress and we may see further clues. But for now, some of that optimism has clearly waned.
If the money leaves China, will it go back to India or will it go back to us? That, I think, is the most important question.
The Kotecha Myth: It’s a very good question and look, right now the US is acting like a big vacuum. It’s just sucking money away from the rest of the world with the amount of money that’s going through taxes or at least the expectations of tax cuts, deregulation and the way the US is becoming more and more isolationist and these kinds of pro-growth measures. a larger budget deficit, which will likely support US growth.
It means that the dollar, and with US interest rates also rising, will continue to suck money out of the rest of the world. And so it is not self-evident that that money goes from China to India. Although, no doubt, we have already seen quite a sharp outflow of foreign investors from India. Some of the concerns in India are, and we are hearing, that growth is starting to moderate. There is uncertainty about what will happen in terms of the central bank and a new governor, and there are clearly some concerns about the impact of dollar strength and higher US yields on most emerging markets. It’s not just India; China could see an outflow. It is also the rest of the emerging markets spectrum that is coming under pressure.
And will the US be the obvious beneficiary, will all the money that will withdraw from China and come from India flow to us?
At least for now, that seems to be the case. But what’s interesting, if you even look at the US markets, at least in the stock market, is that about half of that rally in the S&P post-election period has been reversed. So even in the US, we’ll have to wait and see where we see President Trump or Trump-elect nominate positions for his administration next. Some of these are clearly very interesting from a market perspective and we’ll see how that plays out, whether the Senate confirms these nominations.
We’re probably in a bit of a wait-and-see mode. I don’t think the Trump trade is over. Certainly in the FX we continue to see the dollar rise and if we go back to that earlier conversation, in an environment of strong dollar and probably further strong dollar, it’s going to be difficult for other markets, other emerging markets, but not just in the emerging markets even Europe continues to suffer from the stronger US economy and a strong dollar. So the country continues to see the US benefiting from this environment. It is difficult to see that change in the short term.
