China’s high-quality growth challenge
When China finally lifted Covid restrictions last year, policymakers and companies hoped it would help lift the global economy out of its post-pandemic slump. But data released Monday show the hoped-for recovery in the world’s second-largest economy has yet to materialize, raising broader questions about global growth, the implications for international trade and China’s dealings with the outside world.
Gross domestic product grew only 0.8 percent in the second quarter compared to the first three months of the year, according to official statistics, as declining exports, weak consumer spending and a stalled property sector hammered the economy.
The disappointing data hit commodities and stocks this morning, with Brent crude falling to a one-week low and shares in Chinese dependent luxury groups LVMH and Richemont opening sharply lower. Soon after, Morgan Stanley and Citigroup cut their full-year growth forecasts for China.
The real story lies beyond the headline numbers. Monday’s data revealed that business last month had its worst year-on-year decline since the start of the pandemic, in part because Western consumers cut back on shopping as central banks raised rates. That has added to pressures on manufacturers as companies seek to move their supply chains away from China amid geopolitical tensions and talk of “de-risking”.
“If China can’t change its development model, it won’t change the strains on the economy or on living standards,” George Magnus, a fellow at the University of Oxford’s China Center and a former chief economist at UBS, told DealBook. “The focus has shifted to growth quality rather than quantity, but here too Xi Jinping’s China is very short.”
Will this make China more willing to engage with the West? Beijing is sending mixed messages. Senior officials have launched a charm offensive aimed at international business leaders in recent months. But last week, Chinese state media struck Goldman Sachs after the Wall Street firm recommended selling shares in local banks because of their exposure to risks in the domestic economy.
What next? A group of 20 central bankers and finance ministers are meeting this week in India, with these data adding to their concerns about the state of the global economy. Some pessimists say that the Chinese economy has peaked and a significant slowdown is coming. Chinese policymakers, however, often point out that it took about a year post-Covid for the West’s recovery to kick in, so there’s still a chance things could change this year, Michael Pettisfinance professor at Peking University, told DealBook.
But, Mr. Pettis added, international investors must look at China differently than they once did. “When China grew at double-digit rates, even poor parts of the economy grew,” he said. “Now, that China story is over and it looks like a more normal economy. Some sectors will do well, some will do terribly.”
THIS IS WHAT IS HAPPENING
Russia withdraws from Ukrainian grain export deal. Moscow’s move to end participation in the deal, which allows Ukrainian wheat to flow out of the country despite wartime blockades, could once again swell global food prices. Russia complained that the deal, which was set to expire on Monday, was too favorable to Kyiv.
Microsoft agrees to truce with Sony over its takeover of Activision Blizzard. Microsoft agreed to keep Call of Duty available on Sony PlayStation for 10 years after the US company closes its $70 billion acquisition of Activision Blizzard, resolving one of the biggest disputes surrounding the deal. It’s the latest victory for Microsoft, after a federal judge last week refused to further delay its ability to complete the transaction.
United Airlines reaches a $10 billion settlement with its pilots. The four-year agreement requires salary increases for pilots of up to 40.2 percent over the duration of the contract, as well as improvements to work rules, job security and more. It is the richest ever labor pact at a US airline.
The head of the Teamsters is asking President Biden not to intervene in the UPS labor negotiations. Sean O’Brien, the leader of the union, said he asked the White House stay out of its battle with the logistics giant after talks collapsed this month. The existing contract expires on July 31; sticking points include proposed pay increases for part-time drivers.
The 2024 dilemma of political donors
As the presidential race heats up, many deep-pocketed Democratic supporters have lamented a lack of enthusiasm for President Biden. But the Biden campaign announced recently that it raised more than $72 million in the second quarter — far surpassing what Donald Trump and other Republican candidates raised.
Democratic officials pointed to the news as a sign that the party’s donor class was on board. But some in politics wonder if Mr. Biden has done so well only because no obvious winning alternative to Trump has yet emerged.
Mr. Biden had plenty of support from major donors. Ten gave $500,000 or more to the Biden Victory Fund, including Jeffrey Katzenberg, the Hollywood mogul and co-chairman of his re-election campaign; Reid Hoffman, the co-founder of LinkedIn; and Stewart Bainum, hotel magnate. Other major benefactors included Twilio co-founder John Wolthuis ($300,000) and OpenAI chief Sam Altman ($200,000).
There are some reasons for Mr. Biden to be worried. Small donors – considered crucial to the success of a campaign, as larger ones can hit giving limits quite quickly – have lagged behind in their giving. And Senator Joe Manchin, the West Virginia Democrat who has clashed with Biden on climate policy, goes to New Hampshire on Monday for a town hall organized by No Labels, a group exploring a third-party presidential candidate.
Also, DealBook is still hearing concerns from deep-pocketed potential donors about Biden’s age and grumbling about his administration’s occasional cold shoulder to Wall Street, which has also been slow to support him in 2020.
(Although financiers have been furious about parts of Mr. Biden’s economic approach, including his embrace of tougher antitrust enforcement, they can be encouraged by declining inflation and the reduced likelihood of a recession.)
Compare that to the Republican field:
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Governor Ron DeSantis of Florida pulled heavy donor support including the financier Paul Tudor Jones, the industrialist Dick Uihlein and the venture capitalist Joe Lonsdale.
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Other Republican hopefuls who have his own great supporters include Vivek Ramaswamy (Bill Ackman, Glenn Dubin and Ed Hyman of Evercore ISI), Nikki Haley (Cliff Asness and Tim Draper), Chris Christie (Lew Eisenberg) and Senator Tim Scott (Larry Ellison).
But aside from Mr. DeSantis, who raised $20 million during the quarter, no one came close to the $35 million that Mr. Trump raised during that period; they also trail him badly in public opinion polls. Mr. DeSantis faces other problems: His campaign has moved to shed staff amid heavy spending, and many of its donors have already maxed out what they can give.
It is not clear where else donors would go. Rupert Murdoch privately told associates that he wanted Governor Glenn Youngkin of Virginia to run, although Mr. Youngkin’s support for severe restrictions on abortion might hurt his appeal among some big donors.
And while some moguls have flocked to Robert Kennedy Jr., who is challenging Mr. Biden for the Democratic nomination, his divisive views on vaccines and the coronavirus — recently expressed in a bigoted conspiracy-laden tirade — may make him political kryptonite.
The rising costs of extreme weather
This summer’s weather is shaping up to be particularly dramatic, and sometimes deadly, as record temperatures and violent storms batter much of the planet. That could have dire consequences for people’s lives and livelihoods alike.
July has already set a global record for the hottest days ever, with no calm in sight. New highs can be reached at several points around the globe, from California to Phoenix to southern europe and beyond. Much of this is blamed on the return of the El Niño weather phenomenon.
It’s not just excessive heat. A severe typhoon warning forced Hong Kong’s stock market operator halt trading this morning. Torrential rains ravaged the northeastern United States again this weekend, as flash floods outside Philadelphia killed five, and flight cancellations, power outages and submerged roads forced New Jersey to declare a state of emergency.
Economists warn about the weather, given that it is hitting small businesses hard In tourism-dependent Italy, the country’s health minister, Orazio Schillaci, warned Italians to stay indoors during the hottest hours of the day, and warned tourists that avoid visiting hot places like Colosseum of Rome.
“A common theme across El Niño events is more inflationary pressures as a result of higher commodity prices,” Deutsche Bank strategist Henry Allen wrote in an investor note last month. Rising food prices could make central bankers’ fight against inflation even more difficult.
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In other climate news: Hank Paulson, the former Treasury secretary, warned that efforts to fight climate change, including through greater use of solar and wind energy, should not lead to what he called “the.” global decline in biodiversity.”
Next week
Fed officials are in a quiet period ahead of next week’s big rate-setting meeting, but there are plenty of other developments on the calendar. Here’s what to expect.
Tuesday: Bank of America, Morgan Stanley and Charles Schwab report earnings. Also, retail sales data for June is ready for release.
Wednesday: ASML, Goldman Sachs, Netflix, Tesla and United Airlines reveal results. The UK, which has suffered particularly high inflation, publishes prices for June.
Thursday: American Airlines, Johnson & Johnson and Truist Financial, one of the regional lenders hit by the collapse of Silicon Valley Bank, are set to report earnings.
THE SPEED OF READING
Agreements
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Investors have withdrew $717 million over the past year from the flagship index fund run by Cathie Wood, the financier whose focus on growth stocks has caused her returns to soar — and then crater — in recent years. (WSJ)
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Citadel, the financial giant run by Ken Griffin, wants to disrupt the $10 trillion market in trading US corporate bonds. (FT)
Politics
Best of the rest
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