☀️☕️ China’s “new productive forces" vs 5% Growth

📝 Focus

• China’s “new productive forces" vs 5% Growth

📊 In the Markets

• Powell won’t commit to timing; OpenAI rebuts Musk; ExxonMobil wants Guyana; NYCB turns; Tory budget woos voters

📖 MoneyFitt Explains

• 🎓 Deflation

💸 Personal Finance Corner

• How Female Confidence Impacts the Gender Gap in Investing

📝 Focus

China’s “new productive forces" vs 5% Growth

Premier Li Qiang, Xi Jin Ping’s top deputy, set an economic growth target of “about 5%” for 2024 and vowed a “new leap forward” in his maiden report to China's rubber-stamp parliament. Specifically, he listed support for developing sectors and industries, including electric vehicles, new materials, commercial spaceflight, quantum technology and life sciences, which would unleash "new productive forces". 

Li also pledged to grow ultra-low household spending while curbing industrial overcapacity, restructuring municipal government debt and supporting only "justified" real estate projects. These are positive steps needed to fix China’s deep structural imbalances and manage the pace and extent of the real estate downturn.

But investment in high-tech industries will need funding from somewhere, and Chinese debt is already at about three times its economic output. Huge amounts of debt have financed infrastructure projects and monstrous real estate growth, underpinning China's decades-long economic rise, so limiting growth in debt at a national level while issuing one trillion yuan's worth of special purpose bonds ($139bn, announced Tuesday) risks lower growth as well, particularly in a climate of depressed consumer confidence in the face of deflation🎓 and the ongoing housing market collapse, not to mention its demographic challenges and geopolitical turbulence. Investor and corporate scepticism risks exacerbating the confidence crisis. [MFM: Deflating China; China: Old Before Rich?]

..... ▷ Xi Jinping coined the term "new productive forces" last September, advocating for an innovative economic development model during a visit to an industrial rustbelt city in China, and it is already part of Xi Jinping Thought, the Communist Party’s ruling doctrine. 

It aims to shift the focus from current challenges like weak consumer confidence and local government debt but implementation and success remain uncertain. 

..... ▷ China aims to bolster itself amidst geopolitical tensions, particularly with the US, by prioritising "new productive forces" in technology. 

But increased state subsidies, including the issuing of $139 billion in special purpose bonds for strategic sectors for research and development in 2024, pose risks elsewhere in the economy even while the payoff remains uncertain. 

..... ▷ But against the drumbeat of global investor negativity over the last month in the CSI 300 has rallied over 6%. 

In MFM: “Uninvestable” China? We looked at the other side of the trade, the things a contrarian investor could possibly look at:

• The long-term growth potential of the world's second-largest economy, with a vast domestic market and still young population; 

• The low correlation of Chinese equities with other major markets, offering portfolio diversification benefits and potentially mitigating global economic downturns; 

• The Chinese government’s active support of key industries, attempting Darwinian global competitiveness behind protectionist walls (viz shipbuilding and steel, EVs and semiconductors);  

• And compared to developed markets, many Chinese companies in comparable sectors trade at much lower  (some may say undervalued) valuations; 

• China’s still huge weighting* in emerging market indexes, accounting, as of 31st Dec-23, for 24% of the MSCI Emerging Markets Index, though down from its peak weight in 2020 of 40%.

📊 In the Markets

Wall Street's major indexes rose on Wednesday as Fed Chair Jerome Powell’s testimony before the House Financial Services Committee reinforced expectations of a rate cut this year, though he avoided committing to a timeline. 

Victory over excess inflation "is not assured," but the economy is clear of immediate recession risks… close to but not quite saying it’s the elusive “soft landing.”

Powell will address the Senate Banking Committee on Thursday, but it’s unlikely markets will get many further insights into the Fed's thinking.

Crypto-linked companies rallied, with Coinbase shares rising 10%. CrowdStrike surged 10.8% after projecting better-than-expected annual results on robust enterprise cybersecurity spending. Chinese e-commerce giant JD.com jumped 16.2% on fourth-quarter revenues above expectations (though discount-driven) and on its $3 billion 3-year share buyback programme. 

OpenAI pushed back at co-founder Elon Musk's lawsuit that claims OpenAI breached its original mandate and an agreement to make any breakthroughs in AI “freely available to the public” by forming an alliance with Microsoft and effectively becoming its "closed-source" subsidiary. [MFM: DramaGPT]

But OpenAI’s Altman and team released emails as a blog post revealing Musk’s support for a for-profit entity and a push for $1 billion of funding, which he would underwrite (“I will cover whatever anyone else doesn't provide.”) When Musk didn’t step up, he proposed merging OpenAI into Tesla as its “cash cow”, with Musk the CEO of the combined entity. When that was rejected in 2018, Musk left OpenAI and to pursue his AI dreams, first within Tesla and now outside it in xAI. 

ExxonMobil filed for arbitration against Chevron over its acquisition of Hess, citing a right of first refusal on Hess's stake in a prized Guyana oil find. Exxon holds 45% of the Starboek oil block, while Hess holds 30%. Chevron and Hess have yet to comment. Chevron has previously said that if Exxon's right of first refusal is confirmed, the $53bn deal may not proceed. [MFM: Chevron Bulks Up to Run for Cash; Who Guyana Call?]

Shares of New York Community Bancorp plunged 40% after a WSJ report that it was seeking to sell shares to strengthen its capital against future loan losses. But it rallied sharply to close up 7.5% when it emerged that former Trump Treasury Secretary Steven Mnuchin’s investment firm would lead the $1bn deal. 

NYCB also appointed a new CEO, head of the Office of the Comptroller of the Currency also under Trump. Traders seem comfortable that NYCB’s troubles are not a sign of the start of a new regional banking crisis, while some may be playing it as a Trump Second Term hedge. [MFM: Real Estate Delinquents!; US Offices, Banks and a Tail Risk]

UK Chancellor of the Exchequer (“Finance Minister” for normal people) Jeremy Hunt announced a tax cut for workers in what is likely his final budget before the coming general election. Hunt reduced national insurance by two percentage points, equating to an extra £450 ($572) annually for the average employee in the second cut this year. With his Conservative Party trailing badly behind the opposition in opinion polls, Hunt faced intense pressure to unveil tax cut giveaways to sway voters despite mounting government debt, deteriorating public services and a sluggish economy that was in recession in 2023 and is only expected to expand 0.25% this year.

Asia-Pacific markets mostly rose Wednesday, led by gains in Hong Kong stocks, surging over 2% before trimming gains, while mainland Chinese stocks dipped, with the CSI 300 closing down 0.41% at 3,551.05. This follows China setting its 2024 economic growth target at "around 5%."

📖 MoneyFitt Explains

🎓️ Deflation vs Inflation

Inflation is basically a general increase in prices in an economy over a period of time. 

When this happens, the value, or purchasing power, of money goes down. Inflation is usually caused by too much demand for something relative to how much is available or by the cost of producing (or importing) something going up. Both can lead to a vicious cycle of rising prices, usually when higher prices become expected and built into wage demands.

The Consumer Price Index is a way of measuring inflation in an economy based on the increase in the overall price of a "basket" of items that an average individual would spend on. (There are many measures, but the "CPI" is the most commonly used.)

Deflation is the opposite: A decrease in the general price level of goods and services. This sounds good but can be as damaging in a different way, as buyers may sit on the sidelines and wait for lower prices, thereby sending economic activity through the floor, while their real (inflation-adjusted)debt burden actually goes up.

Disinflation, on the other hand, is a decrease in the rate of inflation, meaning that prices are still going up, but not as quickly as before, on either a month-on-month basis or year over year. This is generally seen as a good thing, especially if inflation is above the target rate.