China is 'stuck' and there's no easy fix: Strategist

Wall Street is showing negative sentiment towards the Chinese economy with many firms trimming their market outlooks on the nation. Macrolens Chief Strategist and Managing Principal Brian McCarthy joins Catalysts to discuss his outlook on the Chinese market.

McCarthy expresses a bearish outlook on the Chinese economy's growth prospects, citing the country's housing market troubles as a key factor. He notes, "Since it became obvious that their housing bubble had busted and was not going to be re-inflatable," the Chinese economy has been grappling with significant challenges. According to McCarthy, this situation has created a debt deflation problem for China, a predicament he believes they cannot escape without an aggressive easing of monetary policy." Ultimately he says. "China is stuck."

"In China's case, they are reluctant to lower rates further," McCarthy told Yahoo Finance. "Rates are just below 2%, and they can't really push them to zero."

Regarding the Federal Reserve's approach to rate cuts, McCarthy warns that if the Fed is "behind the curve" in easing monetary policy, it could have consequences for China. He notes that such a scenario would put pressure on the Chinese yuan (RMB), potentially "greatly exacerbating China's problems."

"It's really not a great place for foreign multinationals to be doing business. And that's before we event get into the wide array of political and geopolitical risks that surround being exposed to China," as he explains to Yahoo Finance.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Angel Smith

Transcripción del vídeo

Chinese markets particularly they closed lower as deflation fears, they're lingering there.

Consumer prices rising at slower pace than economists were expecting as well.

Citigroup.

Now, the latest big bank to trim their expectations you may have seen for the Chinese market here, walk us through your estimations and what you're anticipating out of the region that's trying to really figure out where they can bring the consumer engagement back higher.

Yeah, I've been consistently bearish on Chinese economic growth for about two years now.

Um since it became obvious that their housing bubble had busted and was not going to be inflatable.

And this has put the Chinese system which is saddled with very, very high debts that funded very poor quality investment.

It saddled that economy with a debt deflation problem that history shows whether it's Japan in the nineties, the US in 1920 nine, West 08, you cannot get out of this trap without very very aggressively uh easy monetary policy.

Uh In China's case, they are reluctant to get rates, lower rates are just below 2%.

They can't really push them to zero because all of this debt has been funded by household bank deposits and the households will get really upset if you tell them that you're gonna pay them zero on that money.

The only way China breaks the debt deflation would be big burst of reflation coming from a sizable devaluation of the RMB.

But they're very reluctant to do that for a number of reasons, some of which are geopolitical.

So China is stuck, there is no fix for what ails China absent a significant devaluation in my view.

But once they decide to go down down that path, it's going to be highly destabilizing and just to bring it back to the FED.

If the fed does make a mistake of being behind the curve, technically, that's gonna mean even while they're easing, they're still too tight, that is going to put pressure on the R and B.

It greatly exacerbates China's problem.

So if we get a big risk event in the US where the dollar tends to rally and global credit tightens China is like a powder keg.

On top of that situation, you'll see pressure on the RMB and serious volatility in Chinese equities.

What does that mean for us equities that are most exposed to China's economy?

Yeah.

Well, we we we've seen, you know, earnings in the Chinese equity market are I think down four or 5% year on year.

So there's already the the domestic equities in China are showing that there's serious pressure on consumption rates uh and spending in that economy and a number of companies from Nike to Apple have have suggested that they're seeing a similar phenomenon.

So it's, it's really not a great place for uh foreign multinationals to be doing business.

And that's before we even get into the wide array of sort of political and geopolitical risks that surround being exposed to China.

So I think the uh both from a term of the terms of multinational uh you know, real investment, inward investment in China and financial flows.

Uh I think China is going to remain hands off for most uh foreign investors.