Seizing opportunities for new growth
The new US Federal Reserve Board Chairman Jerome Powell shared his bullish outlook on the US economy in his first Congressional testimony last week. Though it is not clear how many times he will raise interest rates, recent market turmoil will not stop the pace of US monetary normalization. But there are observers who wonder whether the next crisis is approaching.
From the performance of the US bond and stock markets, it appears that the US economy is facing positive prospects instead of a risky future. Crises occur in different markets with different shapes and forms. In between crises, there is always a boom before new obstacles emerge. Although the chance of a new crisis is slender, global economic policies have shifted from stimulating growth to preventing overheating.
Seeking a new economic driver is the major challenge right now. China needs to seize opportunities and avoid risks.
Soon, both the bond and stock markets will make new gains. Right after the Powell testimony, the yield on the 10-year Treasury note surged to 2.92 percent, and the 10-year bond yield is anticipated to jump beyond 3 percent. When the economy is growing, the bond market signals that situation with higher yields, and the stock market follows.
But an economic rebound often is accompanied by a build-up of bubbles. Some bubbles at the current stage represent confidence in the economic recovery, which is healthy, unlike the dangerous bubbles that foretell the hard landing of an overheating economy.
High-technology stocks are outperforming the market, a signal that they’re guiding the emergence of the new economy. However, if the easymoney policy in the US and other global markets persists, excess capital will push up asset prices, which will pressure the recovery of the real economy. It is dangerous when investment returns in the real economy lag behind the yields of high-technology stocks.
Overpriced high-technology stocks will thwart any economic recovery, and risk aversion will gain the upper hand over investor confidence.
Fortunately, central banks in developed countries have taken note of the potential risk and begun to retreat from easy monetary policies to avoid hurting the prosperity of the real economy. This year, the rolling back of quantitative easing will be the main policy orientation of the Fed, though deciding which method to use to achieve monetary normalization could be challenging.
The global economy recovery will have a synergistic effect, because 30 years of economic and financial globalization have made the world deeply intertwined. China will follow the trend of the broader economic recovery.
Preventing systemic financial risk has become the crucial task for China since the 19th National Congress of the Communist Party of China last year. One potential risk is that once monetary policy tightens, the debt issue will become more urgent. State-owned enterprises and local governments have piled up large amounts of debt supported by the easy monetary policy. Another risk is excessive financial innovation, which did not give any impetus to the growth of the real economy but instead aggravated financial risks.
China has chosen the approach of a soft landing to buy some time for reducing systemic financial risk. Three methods are being adopted:
Supply-side reform is being promoted to help companies improve their profits and repay their debts.
The effort to cut overcapacity, reduce excess inventories, deleverage, lower costs and strengthen areas of weakness is intended to tackle the risk of new debt.
Stricter financial supervision is being used to control excessive financial innovation.
The global economic revival has created a better external environment for China. The Chinese economy has a bright future, driven by regional economic integration and new industries such as artificial intelligence and the internet economy. But the nation must also properly deal with systemic financial risk. Monetary normalization in developed countries also will be a key condition for global economic recovery.
Seeking a new economic driver is the major challenge right now. China needs to seize opportunities and avoid risks.