China’s Chance to Rein in its Surplus — or Double Down

FILE PHOTO: Electric cars of Zeekr, a premium brand owned by Chinese automaker Geely, are on display at the Frank-Auto dealership in Moscow, Russia June 14, 2024. REUTERS/Yulia Morozova/File Photo
FILE PHOTO: Electric cars of Zeekr, a premium brand owned by Chinese automaker Geely, are on display at the Frank-Auto dealership in Moscow, Russia June 14, 2024. REUTERS/Yulia Morozova/File Photo
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China’s Chance to Rein in its Surplus — or Double Down

FILE PHOTO: Electric cars of Zeekr, a premium brand owned by Chinese automaker Geely, are on display at the Frank-Auto dealership in Moscow, Russia June 14, 2024. REUTERS/Yulia Morozova/File Photo
FILE PHOTO: Electric cars of Zeekr, a premium brand owned by Chinese automaker Geely, are on display at the Frank-Auto dealership in Moscow, Russia June 14, 2024. REUTERS/Yulia Morozova/File Photo

Two clashing narratives have emerged over China’s heady manufacturing expansion led by electric vehicles, renewable energy and high-tech goods. One says it’s benefiting from comparative advantages, including a giant workforce and domestic market. Another says Beijing’s surging exports are a byproduct of distorting policies that threaten the rest of the world.

Regardless of which is right, Chinese President Xi Jinping and his leadership team have an opportunity next week to either double down on their claim China’s manufacturing prowess is a reflection of normal competition, or tilt toward accommodating economic concerns in foreign capitals from Washington to Brussels, Bloomberg reported on Saturday.

The so-called Third Plenum gathering of the Chinese Communist Party, culminating with an expected readout after the confab concludes July 18, takes place against a backdrop of deepening angst over Chinese industrial growth that notably exceeds the nation’s domestic demand. The objections were on full display in a detailed speech this week by the US Treasury’s top international official, Undersecretary for International Affairs Jay Shambaugh.

Failure to embrace new steps to bolster domestic spending and reduce reliance on exports would put China at increasing risk of trade protectionism—regardless of whether US President Joe Biden wins in November, or if Donald Trump—who launched a trade war against China—prevails.

Data out on Friday offered a fresh reminder of the imbalance between China’s productive capacity and its domestic demand, with its monthly trade surplus hitting an all-time high of $99 billion in June.

China’s leadership and its supporters insist that this commercial prowess is thanks to pure economics. Premier Li Qiang last month put it down to the country’s skill in science and technology, and building “a broad stage for enterprises to pursue innovation and upgrade their products.”

Years of investment in STEM (science, technology, engineering and mathematics) subjects and churning out engineers has bolstered research and development, strengthening China’s advantage, says Zhao Zhongxiu, president of the University of International Business and Economics in Beijing.

The improved quality and reduced cost of Chinese-made goods appeal to consumers around the world, and it’s not a question of subsidies but the fruit of organic industrial development, he argued in a recent Bloomberg Television interview. “China’s industry has benefited from this comparative advantage.”

But that’s not how Shambaugh sees it. In a speech this week before the Council on Foreign Relations, he cited analysis from the Center for Strategic and International Studies showing that China spends 5% of its GDP on industrial subsidies—a share that’s ten times bigger than that of the US. It also dwarfs subsidies by Germany, Japan and fellow emerging market Brazil.

“In sectors like semiconductors, steel and aluminum, China alone accounts for between 80% and 90% of global subsidies provided to those industries,” Shambaugh said.

That’s contributed to China racking up a manufacturing-goods trade surplus that’s approaching 2% of world GDP, or roughly twice the share of the famous Japanese surplus in the early 1990s that roiled US-Japan relations, according to data cited by Shambaugh.

The Treasury undersecretary ran through figures illustrating falling rates of capacity utilization and rising numbers of unprofitable companies, all suggesting overcapacity. In areas including the solar energy sector, Chinese firms themselves have expressed concerns about a supply glut.

“Emerging patterns suggest the size of subsidies in China is only increasing, especially at local and provincial levels,” he also said.

That observation puts a premium on the policy signals that Xi and his lieutenants send out at the Third Plenum, which will chart the over-arching course for the next five years.



Gold Edges Down as Markets Eye Fed's 2025 Monetary Policy Outlook

Gold bars from the vault of a bank are seen in this illustration picture taken in Zurich November 20, 2014. REUTERS/Arnd Wiegmann/File Photo
Gold bars from the vault of a bank are seen in this illustration picture taken in Zurich November 20, 2014. REUTERS/Arnd Wiegmann/File Photo
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Gold Edges Down as Markets Eye Fed's 2025 Monetary Policy Outlook

Gold bars from the vault of a bank are seen in this illustration picture taken in Zurich November 20, 2014. REUTERS/Arnd Wiegmann/File Photo
Gold bars from the vault of a bank are seen in this illustration picture taken in Zurich November 20, 2014. REUTERS/Arnd Wiegmann/File Photo

Gold prices edged lower as the dollar held firm on Wednesday, with investors awaiting a key US Federal Reserve decision expected to shape market sentiment and gold's trajectory by outlining the central bank's 2025 outlook.

Spot gold slipped 0.3% to $2,637.13 per ounce by 10:00 a.m. EST (1500 GMT). US gold futures were down 0.3% at $2,653.20.

The Fed's 2025 economic projections and decision are due at 2 p.m. EST (1900 GMT), followed by Fed chair Jerome Powell's press conference at 2:30 p.m. EST, Reuters reported.

"What markets will truly focus on is the tone set by Jerome Powell. A hawkish stance could drive Treasury yields higher and bolster the dollar, putting downward pressure on gold prices," said Ricardo Evangelista, senior analyst at ActivTrades.

"Conversely, a more cautious tone might provide some support for bullion."

While markets are pricing in a 99% probability of a 25 basis point rate cut during this meeting, the chances of another reduction in January stand at only 17%.

Non-yielding gold tends to do well in a low-interest-rate environment.

Traders are also watching out for key US GDP and inflation data due later this week that could further shape expectations around monetary policy.

"I do see the consolidation as a continuation pattern within the longer term uptrend in gold. I think that trend will re-exert itself in the first quarter of 2025," said Peter Grant, vice president and senior metals strategist at Zaner Metals.

Grant highlighted that bullion remains underpinned by easing central bank policies, geopolitical tensions, sustained buying by central banks, and rising global political instability.

UBS echoed this sentiment in a note, predicting gold would "build on its gains in 2025." The bank emphasized that central banks are likely to continue accumulating gold as they diversify reserves, while heightened demand for hedges could drive inflows into gold-backed exchange-traded funds (ETFs).

Spot silver fell 1.1% at $30.19 per ounce, platinum slipped 1.3% to $926.90, while palladium declined 1.3% to $922.19.