It was only a year ago that Beijing and Moscow touted a new world order, but things appear to be unraveling fast for their economies. Exports, manufacturing activity and property prices are sliding in China, which has decided to stop reporting the country’s rising youth unemployment rate, while a worsening debt crisis and deflationary spiral are threatening growth. A collapse in commodity-based export revenues and extensive military spending have also weighed on sanctioned Russia, which just saw the ruble fall past the psychologically important level of 100 to the dollar after tumbling 37% YTD.
Tale of two central banks: While the news has been grim, the countries are responding to their economic problems in different ways. On Tuesday, China slashed a range of key interest rates to shore up its economy, aiming to reignite growth and investment. It followed missed payments by Country Garden Holdings (OTCPK:CTRYF) – one of China’s largest developers of real estate – in a sector that accounts for a quarter of overall economic activity. On the other hand, Russia’s central bank hiked rates by 3.5 percentage points at an emergency gathering, bringing its key rate to a total of 12%, fearing inflationary pressures that could ripple through its economy.
As many Western companies have already pulled out of Russia, or are attempting to do so, investors are keeping a closer eye on the impacts of multinationals operating in China. Recent earnings calls from industrial players have been flagging increasing headwinds, such as warnings from Caterpillar (NYSE:CAT), Danaher (NYSE:DHR), Dow Inc. (NYSE:DOW), DuPont (NYSE:DD), LyondellBasell (LYB) and Parker Hannifin (PH). Click through the transcripts and search for “China.”
“While there is always a chance of a positive breakthrough in U.S.-Chinese relations that will lift Chinese stocks, markets reflect the current economic and geopolitical landscapes,” noted SA Investing Group Leader Andrew Hecht.
What to watch: The gloomier outlook means China might miss its annual GDP growth target of 5% this year as it looks to sort out its economic problems. The first thing that needs to be addressed is the concern of growing financial contagion, and debt problems that span from local authorities to the central government. Declining domestic demand means shortfalls in tax revenues, while weakness in finances could harm Beijing’s fiscal policy toolkit to help support the economy.
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