G7 Chinese Takeaways

Western leaders sent a strong message to Russia at the recent G7 meeting in Hiroshima by inviting Volodymyr Zelensky to attend. However, the G7 also had China in its sights.

As the world’s second-largest economy and a key component of global supply chains, Western economies have become inextricably dependent on China but competition with Beijing has increased and they disagree on many issues, from human rights to Taiwan. Beijing has not been afraid to slap trade sanctions on countries that have displeased them. This includes South Korea, after Seoul installed a US missile defence system and Australia as it supported the US in banning Chinese telecom provider Huawei from its 5G network.

The G7 condemned what it sees as a disturbing rise of the ‘weaponisation of economic vulnerabilities’ which seeks to undermine the foreign and domestic policies and positions of G7 members and its partners around the world. They have called for a ‘de-risking’ – a policy championed by EU president Ursula von der Leyen. This appears to be a more moderate version of the US idea of ‘de-coupling’ from China. The G7 intends to secure supply chains for key items such as semiconductor chips and strengthen digital infrastructure to prevent hacking and the theft of intellectual property. They are also looking to impose multi-lateral export controls to ensure military technology and intelligence does not end up in the hands of ‘malicious actors.’

Following the G7 meeting China has countered by imposing a ban on US memory chip maker Micron Technology citing that ‘it poses serious network security risks.’ This is China’s first major move against a US chip maker and reflects the ongoing technology and trade war between the US and China.

Economists had expected China’s exit from lockdown to give a ‘shot in the arm’ to global economic growth. Recent economic data has disappointed, reflecting domestic pressures while Chinese manufacturers appear to be suffering as western economies have been affected by higher interest rates. If more US and European companies reduce their supply chain exposure to China then this may create an additional headwind for China’s economy. Not a cold war yet, but certainly a cold summer and what happens to US-China relations should Donald Trump become US president again at the end of 2024?

 

What have we been watching?

 

The good, the bad and the ugly. The good news was US lawmakers passing the debt ceiling deal in a crucial step to avert historic default. The bad was China’s weak economic recovery as the quick re-bound expected after the relaxation of zero-covid policies has not materialised, although this has raised market hopes of further stimulus measures. The ugly was the UN warning of a potential accident at the Zaporizhzhia nuclear power plant in Ukraine. Meanwhile the US ‘AI frenzy’ continued last week with AI chip-maker Nvidia briefly joining the one trillion-dollar market capitalisation club, alongside the likes of Apple.

---

 

In the UK, lender Nationwide said that house prices in the year to May dropped by 3.4%, the biggest decline in fourteen years. Prices were just 0.1% lower in May but the Nationwide said ‘the headwinds to the housing market look set to strengthen in the near term.’ The news comes as more mortgage offers are being withdrawn by lenders and some 100,000 households face a revision to their fixed rate deals.

---

 

Inflation in Germany slowed significantly in May at 6.1% with energy and food prices easing. The data may signal a broader trend across the Eurozone and prompt the European Central Bank to re-consider its tightening plans.

---

 

The US Congress approved a debt ceiling and budget cuts package. The hard-fought deal pleased few, but politicians obviously thought this ‘the lesser of two evils’, with a devastating economic upheaval if Congress had failed to act. Meanwhile, some members of the Federal Reserve (Fed) suggested ‘skipping a rate hike at a coming meeting would allow the Fed Committee to see more data before making decisions about the extent of additional policy firming.’  Meanwhile, US headline payrolls rose a much stronger than expected 339,000, but the unemployment rate jumped to 3.7%.

---

 

Japan’s manufacturing sector returned to growth in May with the PMI business activity indicator climbing to 50.6, with stronger domestic demand offsetting softer exports. Japan’s services sector continued to recover in May, with the PMI indicator climbing to 55.9.

---

 

There was mixed data from China’s manufacturing sector. The ‘official’ PMI business activity indicator shrank in May for the second successive month, falling to 48.8 which was below expectations raising concerns about the country’s bounce-back from covid lockdown. However, the subsequently released Caixin manufacturing reading for May rose to 50.6, albeit this indicator mainly covers smaller and more export orientated businesses than the official PMI. Meanwhile, the upturn in China’s service sector continued in May with the Caixin service PMI indicator climbing to 57.1.  China is said to be working on some stimulus measures to help support the property sector.

---

 

Brent oil edged lower to $73 following the weaker than expected Chinese economic data. However, over the weekend OPEC+ agreed a further cut in production of 1 million barrels a day for one month in July and Saudi Arabia stated that it could consider extending this beyond July, which will keep oil traders guessing.

---

Finally, another sign that all might not be well in China. Youth unemployment in China is reported to have hit a record high of over 20% in April. Furthermore, nearly 11.6million Chinese students are set to graduate in June but are facing a challenging jobs market. The Chinese authorities are aware of the problem and have announced some new policies including subsidies for companies that hire unemployed university graduates. However, given the more challenging economic outlook in China will this be enough?

Read Last Week’s Alpha Bites – Facing Election Rejection?

 

Further information about Alpha Portfolio Management, our products and services, please visit www.alpha-pm.co.uk or email info@alpha-pm.co.uk. Alternatively, you can call us on 0117 203 3460.

This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.

You should seek professional advice before making any investment decisions. The past is not necessarily a guide to future performance. The value of shares and the income from them can fall as well as rise and investors may get back less than they originally invested. The sender does not accept legal responsibility for any errors or omissions, in the context of this message, which arise as a result of internet transmission or as a result of changes made to this document after it was sent.

Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the FCA.
Registered Office: 1 The Square, Temple Quay, Bristol, BS1 6DG. Registered in England No. 2489639
Copyright © 2021 Alpha Portfolio Management, All rights reserved

Trading name text

Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.