Taiwan Dominates the World's Supply of Computer Chips – No Wonder the U.S. is Worried

China-U.S. Relations

Summary:

Taiwan's autonomy is a vital geopolitical interest for the U.S. because of the island's dominance of the semiconductor manufacturing market, notes this academic.

One aspect of Nancy Pelosi's trip to Taiwan that has been largely overlooked is her meeting with Mark Lui, chairman of the Taiwan Semiconductor Manufacturing Corporation (TSMC).

Pelosi's trip coincided with U.S. efforts to convince TSMC – the world's largest chip manufacturer, on which the U.S. is heavily dependent – to establish a manufacturing base in the U.S. and to stop making advanced chips for Chinese companies.

U.S. support for Taiwan has historically been based on Washington's opposition to communist rule in Beijing, and Taiwan's resistance to absorption by China. But in recent years, Taiwan's autonomy has become a vital geopolitical interest for the U.S. because of the island's dominance of the semiconductor manufacturing market.

Semiconductors – also known as computer chips or just chips – are integral to all the networked devices that have become embedded into our lives. They also have advanced military applications.

Transformational, super-fast 5G Internet emerged is enabling a world of connected devices of every kind (the Internet of Things) and a new generation of networked weapons. With this in mind, U.S. officials began to realise during the Trump administration that U.S. semiconductor design companies, such as Intel, were heavily dependent on Asian-based supply chains for the manufacturing of their products.

In particular, Taiwan's position in the world of semiconductor manufacturing is a bit like Saudi Arabia's status in OPEC. TSMC has a 53 per cent market share of the global foundry market (factories contracted to make chips designed in other countries). Other Taiwan-based manufacturers claim a further 10 per cent of the market.

Taiwan Dominates the World's Supply of Computer Chips – No Wonder the U.S. is Worried_1

As a result, the Biden administration's 100-Day Supply Chain Review Report says: "The United States is heavily dependent on a single company – TSMC – for producing its leading-edge chips."

The fact that only TSMC and Samsung (South Korea) can make the most advanced semiconductors (known as five nanometres) "puts at risk the ability to supply current and future [U.S.] national security and critical infrastructure needs".

This means that China's long-term goal of reunifying with Taiwan is now more threatening to U.S. interests. In the 1971 Shanghai Communique and the 1979 Taiwan Relations Act, the U.S. recognised that people in both mainland China and Taiwan believed that there was One China and that they both belonged to it.

But for the U.S., it is unthinkable that TSMC could one day be in territory controlled by Beijing.

"Tech War" Between the U.S. and China

For this reason, the U.S. has been trying to attract TSMC to the U.S. to increase domestic chip production capacity. In 2021, with the support of the Biden administration, the company bought a site in Arizona on which to build a U.S. foundry. This is scheduled to be completed in 2024.

The U.S. Congress has just passed the Chips and Science Act, which provides U.S.$52 billion in subsidies to support semiconductor manufacturing in the U.S.. But companies will only receive Chips Act funding if they agree not to manufacture advanced semiconductors for Chinese companies.

This means that TSMC and others may well have to choose between doing business in China and in the U.S. because the cost of manufacturing in the U.S. is deemed to be too high without government subsidies.

This is all part of a broader "tech war" between the U.S. and China, in which the U.S. is aiming to constrain China's technological development and prevent it from exercising a global tech leadership role.

In 2020, the Trump administration imposed crushing sanctions on the Chinese tech giant Huawei that were designed to cut the company off from TSMC, on which it was reliant for the production of high-end semiconductors needed for its 5G infrastructure business.

Huawei was the world's leading supplier of 5G network equipment but the U.S. feared its Chinese origins posed a security risk (though this claim has been questioned). The sanctions are still in place because both Republicans and Democrats want to stop other countries from using Huawei's 5G equipment.

The British government had initially decided to use Huawei equipment in certain parts of the UK's 5G network. The Trump administration's sanctions forced London to reverse that decision.

A key U.S. goal appears to be ending its dependency on supply chains in China or Taiwan for critical technologies, which includes advanced semiconductors needed for 5G systems, but may include other advanced tech in future.

Pelosi's trip to Taiwan was about more than just Taiwan's critical place in the "tech war". But the dominance of its most important company has given the island a new and critical geopolitical importance that is likely to heighten existing tensions between the U.S. and China over the status of the island. It has also intensified U.S. efforts to "reshore" its semiconductor supply chain.

Source: CNA

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Devin

Egypt is pinning high hopes on the Russian-Ukrainian deal sponsored by Turkey and the United Nations on July 22, to unblock Ukraine's Black Sea grain exports after nearly five months of fighting that halted exports. Cairo hopes the landmark deal would allow it to resume its wheat imports. The deal will allow shipments held up in Ukrainian ports to head to various countries around the world, including Egypt.

In a televised statement to Sada al-Balad channel July 27, Egyptian Minister of Supply and Internal Trade Ali al-Moselhi described the deal as a "glimmer of hope."

He said that a vessel loaded with 63,000 tons of wheat expected by Egypt has been docked at a Ukrainian port since day three of the Russian war on Ukraine, noting that the new agreement would allow releasing the shipment.

Moselhi continued, "This shipment will move from Ukraine to Egypt through the safe route from the Black Sea ports to the Bosporus and then to the Mediterranean Sea. The Egyptian Ministry of Foreign Affairs was contacted to speed up the exit of that shipment from Ukraine."

Egypt's wheat imports cover nearly 62% of the country's total wheat needs; about 85% of these imports come from both Russia and Ukraine, according to a document sent by the Egyptian government to the World Bank in May, in a bid to obtain financing of $500 million aimed at managing Egypt's needs for imported wheat in light of the ongoing repercussions of the Russian war in Ukraine on global markets. The financing was approved by the World Bank in late June.

Egypt's state grain buyer known as the General Authority for Supply Commodities signed a contract at the end of June with France, Romania, Russia and Bulgaria to buy 815,000 tons of wheat, in the largest such purchase since 2012.

Ahmed Kamal al-Attar, head of the Central Administration of Plant Quarantine, told Al-Monitor that Egypt is counting on the recent Russian-Ukrainian agreement to facilitate resuming imports of wheat from Ukraine to Egypt. "This will only happen if the deal is implemented on the ground and Russia abides by it," he said.

On Aug. 3, Turkish, Russian and Ukrainian experts in Istanbul inspected the vessel that carried the first shipment of grain exported by Ukraine since the Russian invasion in February, before continuing its way from Turkey to Lebanon, where it will lay its cargo of 26,000 tons of corn.

Attar, however, noted, "Egypt will not send inspectors to examine the wheat imported from the Ukrainian ports until after getting sufficient assurances about the stability of the situation there. Each shipment will be examined separately. For example, shipments from a port on the Polish border are deemed to be safe and we will send inspectors to check the cargo. We will not be sending inspectors to ports within the current conflict zones."

The Egyptian government usually sends inspectors from the Central Administration of Plant Quarantine to check wheat shipments at the port of origin before the vessels set sail.

Egypt's Central Agency for Public Mobilization and Statistics reported in March that the country's imports of wheat stood at $2.4 billion during the first 11 months of 2021, at a rate of 6.1 million tons. Russia topped the list of the 10 countries from which Egypt imported wheat during the first 11 months of 2021, with Egypt importing 4.2 million tons at $1.2 billion from Moscow, representing 69.4% of Egypt's total imported wheat. Ukraine came in second, with 651,400 tons, worth $649.4 million, accounting for 10.7% of total imports.

Attar added, "The strategic reserves of wheat in Egypt are safe at the present time, and there were no problems in managing the country's needs recently."

In a televised news conference July 29, Prime Minister Mostafa Madbouly asserted Egypt's strategic wheat reserves are sufficient to cover its needs for four months.

Yemen Hamaki, professor of economics at Ain Shams University, told Al-Monitor by phone that the agreement between Russia and Ukraine brings two advantages to the Egyptian government. "The agreement will reopen the Ukrainian market to export wheat to Egypt again and reduce wheat and grain prices. This supports the Egyptian economy, given that Egypt is the largest wheat buyer in the world," he said.

According to a Bloomberg report July 28, "Egypt canceled four cargoes of Ukrainian wheat that it contracted to buy before Russia's invasion. … State buyer GASC scrapped the purchase of 240,000 tons for February and March delivery that never loaded in Ukraine."

However, Mykhailo Nepran, first vice president of the Ukrainian Chamber of Commerce and Industry, told the Ukrainian Hromadske TV channel Aug. 1 that Egypt did not abandon Ukrainian wheat shipments, but would conclude a new contract to export them.

Nepran explained his country was unable to fulfill the contract in a timely manner due to the blockade of the ports. "Therefore, a completely civilized decision was made at the legislative level: to close the contract that cannot be fulfilled and open a new one, according to which the purchase will be made," he said.

A source at the Egyptian Ministry of Supply told Al-Monitor on condition of anonymity, "Egypt is counting on the success of the Russian-Ukrainian agreement, and is considering importing wheat shipments from Ukraine in the coming period, given its high quality."

Hamaki added, "The Egyptian government still subsidizes the bread that citizens get, which comes at high costs. Therefore, the higher the cost of importing wheat, the higher the subsidies granted by the Egyptian government to support bread, which imposes a greater burden on the state's budget."

On June 21, the Egyptian parliament approved an increase of subsidies of food commodities, including bread, in the state's general budget for fiscal year 2023 to reach 90 billion Egyptian pounds ($4.7 billion), with an increase of about 3 billion Egyptian pounds ($0.15 billion) compared to fiscal 2022.

Rashad Abdo, head of the Egyptian Forum for Economic and Strategic Studies, told Al-Monitor, "The Istanbul-sponsored agreement between Russia and Ukraine on the export of grain will be beneficial to the whole world, and to Egypt in particular, which relies heavily on wheat imports from Ukraine to meet its local needs. Like any other commodity, when the supply of wheat increases prices will fall, leading to importing at lower prices."

He said, "This step would ease the economic crisis in the country, especially since Cairo was forced to buy many shipments of wheat at high prices since the outbreak of the war between Moscow and Kiev in February."

Source: Al Monitor

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Devin

Switzerland does not expect to dip into recession this year despite the threat of an energy supply squeeze, the government's chief economist said Sunday.

The Swiss economy is "doing well" despite the impact of the war in Ukraine on energy prices, Eric Scheidegger told the SonntagsZeitung newspaper.

He said it was down to companies to steel themselves for the possibility of power shortages in the winter months.

"We may have to revise our economic forecast downwards for next year. The revised forecast will be published on September 20. However, we do not expect a recession for this year," Scheidegger said.

"We run the risk of an energy supply bottleneck in winter. If there are persistent production interruptions in the EU and we ourselves have a gas shortage, it becomes problematic.

"In our negative scenario, we expect zero growth for 2023 instead of growth of almost two percent."

Despite the threat of power shortages and the effects of the war in Ukraine, Scheidegger does not see a serious economic crisis heading towards Switzerland.

"At present, the economy is still doing well. Current indicators show that the economy in this country also developed well in the second quarter — after the outbreak of the war in Ukraine," he said.

"Economic support measures such as general perks or tax relief are currently therefore neither necessary nor helpful," he added.

'Foreseeable events'

Scheidegger said the Swiss economy was less susceptible to high energy prices than other European countries as gas accounted for only five percent of its total energy consumption.

He said the government would discuss possible measures to curb high energy prices in the coming weeks, which could involve reducing health insurance premiums for low-income households.

The State Secretariat for Economic Affairs official said the help for businesses during the Covid-19 pandemic could not become the norm during economic downturns.

"It's been known since spring that there can be a power shortage in winter. Companies have time to prepare for this," he said.

"Companies can, and must, take this operational risk into account… it is up to companies to prepare for foreseeable events."

As for inflation, he said Switzerland was "an island of bliss" compared to the United States, and inflation was likely to fall before the end of the year.

"At 3.4 percent, inflation is much lower here than in other countries. Core inflation — inflation excluding fresh food, energy and fuel — is at two percent," he said.

Source: AFP

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Alex

To understand the strange, conflicting signals being sent by the U.S. economy right now, it helps to look at Williston, North Dakota, in about 2010.

North Dakota was in the midst of an oil boom. Scores of rigs were drilling hundreds of wells, filling up train cars with crude because there hadn't been time to build a pipeline. Pretty much anyone who wanted a job could find one, even the teenagers who dropped out of high school to work in the oil fields. Wages soared. Fast-food restaurants offered signing bonuses. State coffers filled up with tax revenue.

Yet as good as the economy was, it also felt unstable. Restaurants couldn't hire enough workers. Housing was in short supply, and costly. Local infrastructure couldn't withstand the sudden surge in demand. Prices for practically everything soared.

"It was chaotic," said David Flynn, an economist at the University of North Dakota who lived through the boom and has studied it. "The economy was doing well, revenues for the local areas were up across the board, but you were still short of workers and businesses were having trouble."

"That sounds a lot like the stories you've been hearing at the national level for the past couple years," he added.

Economists and politicians have spent weeks arguing about whether the United States is in a recession. If it is, the recession is unlike any previous one. Employers added more than half a million jobs in July, and the unemployment rate is at a half-century low.

Typically, in recessions, the problem is that businesses don't want to hire and consumers don't want to spend. Right now, businesses want to hire, but can't find the workers to fill open jobs. Consumers want to spend, but can't find cars to buy or flights to book.

Recessions, in other words, are about too much supply and too little demand. What the U.S. economy is facing is the opposite. Just like North Dakota in 2010.

The underlying causes are different, of course. Williston was hit by a surge in demand as companies and workers flooded into what had been a small city in the Northern Plains. The United States was hit by a pandemic, which caused a shift in demand and disrupted supply chains around the world. And the comparison goes only so far: Williston's population roughly doubled from 2010 to 2020. No one expects that to happen to the country as a whole.

Still, whether local or national, the most obvious consequence is the same: inflation. When demand outstrips supply — whether for steel-toe boots in an oil boomtown or for restaurant seats in the aftermath of a pandemic — prices rise. Flynn recalled going out to eat during the boom and discovering that hamburgers cost $20, a feeling of sticker shock familiar to practically any American these days.

There is also a subtler consequence: uncertainty. No one knows how long the boom will last, or what the economy will look like on the other side of it, which makes it hard for workers, businesses and governments to adapt. In Williston, companies and governments were reluctant to invest in the apartment buildings, elementary schools and sewage-treatment plants that the community suddenly needed — but might not need by the time they were complete.

"Think of it as a situation of every day, seemingly, was a new shock, so you couldn't even adjust before a new one was hitting," Flynn said. "It's that constant adjustment. Completely unpredictable."

Businesses have now spent 2½ years in a state of constant adjustment. In early 2020, practically overnight, Americans traded restaurant meals for home-baked bread, and gym memberships for socially distanced bike rides. Those shifts caused huge disruptions, in part because businesses were reluctant to make long-term investments to address short-term spikes in demand.

"That was always going to cause its own problems on prices and shortages," said Adam Ozimek, chief economist for the Economic Innovation Group, a Washington research organization. "Businesses were never going to be like, 'I'm going to build 10 new bicycle factories right now because we're in a long-term bicycling boom.'"

Some other shifts caused by the pandemic are likely to prove longer lasting. But it is hard for businesses to know which.

"I think businesses are correct that the current state of the economy can't really hold — something has to give," Ozimek said.

To most people, of course, this doesn't feel like a boom. Measures of consumer confidence are at record lows, and Americans overwhelmingly say they are dissatisfied with the economy. That perception is grounded in reality: High inflation is eroding — and in some cases erasing — the benefits of a strong job market for many workers. Hourly earnings, adjusted for inflation, are falling at their fastest pace in decades.

"I know people will hear today's extraordinary jobs report and say they don't see it, they don't feel it in their own lives," President Joe Biden said Friday. "I know how hard it is. I know it's hard to feel good about job creation when you already have a job and you're dealing with rising prices — food and gas and so much more. I get it."

Tara Sinclair, an economist at George Washington University, said the United States wasn't experiencing a true boom. That would imply a virtuous circle, in which prosperity begets investment, which begets more prosperity and makes the economy more productive in the long term — a rising tide that lifts all boats.

Instead, the lingering disruptions of the pandemic, uncertainty over what the post-COVID economy will look like and fears of a recession have made businesses reluctant to make bets on the future. Business investment fell in the most recent quarter. Employers are hiring, but they are leaning heavily on one-time bonuses rather than permanent pay increases.

"It's not an economic boom in the sense of wanting to invest long term," Sinclair said. "It's a boomtown situation where everyone's just waiting for it to get cut off."

Indeed, the Federal Reserve is trying to cut it off. Jerome Powell, the Fed chair, has described the labor market, with twice as many open jobs as unemployed workers, as "unsustainably hot," and is trying to cool it through aggressive interest rate increases. He and his colleagues have argued repeatedly that a more normal economy — less like a boomtown, with lower inflation — will be better for workers in the long term.

"We all want to get back to the kind of labor market we had before the pandemic, where differences between racial and gender differences and that kind of thing were at historic minimums, where participation was high, where inflation was low," Powell said last month. "We want to get back to that. But that's not happening. That's not going to happen without restoring price stability."

Biden and his advisers, too, have argued that a cooling economy is inevitable and even necessary as the country resets from its reopening-fueled surge. In an opinion article in The Wall Street Journal in May, Biden warned that monthly job growth was likely to slow, to around 150,000 a month from more than 500,000, in "a sign that we are successfully moving into the next phase of the recovery."

So far, that transition has been elusive. Forecasters had expected hiring to slow in July, to a gain of about 250,000 jobs. Instead, the figure was above 500,000, the highest in five months, the Labor Department reported on Friday. But the labor force — the number of people who are either working or actively looking for work — shrank and remains stubbornly below its pre-pandemic level, a sign that the supply constraints that have contributed to high inflation won't abate quickly.

Sinclair said it shouldn't be surprising that it was taking time to readjust after the coronavirus disrupted nearly every aspect of life and work. As of July, the U.S. economy, in the aggregate, had recovered all the jobs lost during the early weeks of the pandemic. But beneath the surface, the situation looks drastically different from what it was in February 2020. There are nearly half a million more warehouse workers today, and nearly 90,000 fewer child care workers. Millions of people are still working remotely. Others have changed careers, started businesses or stopped working.

"We have to remember that we are still sorting that out," Sinclair said. "It was a big economic shock, and the fact that we came out of it as quickly as we did is still incredibly impressive. These residual pains are us just still adjusting to it."

Source: The New York Times

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Devin

Did the UK economy shrink in the second quarter?

The UK economy is expected to contract marginally in the second quarter as it heads for a recession of a scale not seen since the 1990s later this year.

Economists polled by Reuters forecast a report on Friday to show output contracted 0.2 per cent between the first and the second quarter. Gross domestic product is forecast to have shrunk by 1.3 per cent between May and June, affected by the Jubilee extra bank holiday and partially reversing May's expansion.

This follows growth of 0.8 per cent in the first quarter with the slowdown reflecting the impact of the hit to households' finances from surging energy prices.

Last week, the Bank of England downgraded its UK economic forecast as it increased interest rates by the largest margin in nearly 30 years.

After some growth in the third quarter, the bank said that the UK is projected to enter recession from the fourth quarter of this year and to continue to contract until the end of 2023. After that, growth is expected to be "very weak by historical standards," the Bank said.

This is a significant downward revision from the May assessment, following the new surge in gas prices that reflected the protracted war in Ukraine and cuts in gas supply to Europe.

"The big picture though is that the economy is still on track to be smaller in 2025 than it was in 2019, before the pandemic," said Thomas Pugh, economist at the consultancy RSM UK. "The much weaker economy is likely to create more unemployment." Valentina Romei

Is U.S. core CPI being overlooked?

Headline inflation captures the highly visible food and petrol categories that sting consumers' pocketbooks when prices soar, but the U.S. core consumer price index — which excludes those volatile categories — is expected to outpace the headline number in July, and may continue to in months to come.

Economists polled by Reuters expect U.S. headline inflation to increase 0.2 per cent month over month from June to July, while core CPI is expected to rise 0.5 per cent. The report is due out on Wednesday.

Derek Holt, head of capital markets economics at Scotiabank, sees core CPI as the figure that may more clearly show how persistent inflation is in the U.S.. He said that the U.S. might have already reached peak inflation in terms of food and fuel, but expects price growth for durable goods and some services to continue rising.

"We're still in the phase that gets a reopening effect on the more volatile high contact, service prices where people are getting out and about in the summer and travelling more," he said.

Property and vehicle prices, for example, could continue to rise as food and fuel prices plateau, especially after OPEC+ last week agreed to a slight production increase and Ukraine and Russia agreed a deal that allows Ukraine to export its grain into a supply-constrained market.

But heightened tensions between China and Taiwan could disrupt the island's dominant semiconductor industry and send ripples through the global economy.

"A disruption to Taiwan would strike to the heart of many manufactured durable and big-ticket items and grind a lot of supply chains to a bigger halt," Holt said, with the caveat that he does not expect that kind of eruption. Jaren Kerr

Will eurozone industrial production stall?

The eurozone is set for a deceleration in economic activity as rising interest rates and surging food and fuel prices caused by Russia's war in Ukraine push the region towards recession.

Eurozone industrial production data for June is set to be released on Friday and will show the impact of soaring energy prices and prolonged supply chain disruption on industrial output. The May figure beat analysts' expectations, with industrial production rising 0.8 per cent on a month-over-month basis, but analysts are now expecting it to flatline in June.

"Activity in the euro area is deteriorating in a broad-based fashion, across sectors and countries," said Barclays analysts, who expect the bloc to fall into recession by the end of the year.

German manufacturing orders fell in June as the eurozone's largest economy grappled with supply chain issues and interruptions stemming from the Ukraine war. Analysts and economists broadly expect the region to slip into recession, as business and industrial activity declines and consumer spending slows, squeezed by the cost of living and energy price crisis.

Source: FT

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Alex

As the resurgent COVID-19 pandemic that hit parts of China earlier this year increasingly comes under better control, economic recovery is gradually taking shape. But due to outbreak disruptions that continue to periodically appear, no signs of a sustained economic rebound were evident as of the end of June. Less-than-stellar data in consumption, investment and market confidence show that mild recovery rather than a robust rebound is more likely in the second half.

As the peak of outbreak disruptions recedes, policies regarding population flows and transportation have been adjusted accordingly. Recoveries in logistics, business activity and daily consumption have been quite noticeable.

In April, the purchasing managers' index for manufacturing and nonmanufacturing sectors withered to 47.4 and 41.9, respectively. However, the two indicators climbed to 49.6 and 47.8 in May and clawed back to expansionary territory one month later with readings of 50.2 and 54.7.

Recovery in economic activity seems to be quite strong based on the PMI data, especially in the nonmanufacturing sector. The two indicators in June approached levels seen in April 2019.

But the above increases were only inferred on a monthly basis. The data reported in May, still in contraction territory, showed that fundamental improvements are still absent. The rebound in June was mainly recovery based on comparisons to the drastic contraction during the previous two months.

It should also be noted that the PMI is a subjective indicator, comparable to the GDP growth rate, in order to arrive at a more unbiased and nuanced understanding. China's GDP growth rate in the second quarter came in at 0.4 percent, said the National Bureau of Statistics, which was much lower than the previous market consensus of a 1 to 1.5 percent estimate. This shows that PMI readings have overestimated economic recovery momentum.

The country's aggregate financing to the real economy totaled 2.8 trillion yuan ($414 billion) in May, up from 1.9 trillion yuan recorded during the same period last year. However, it should be noted that the significant year-on-year increase is mainly attributable to rising renminbi loans and government bonds, while other factors, such as personal short-term loans, remained flat or even reported declines.

Incremental renminbi loans in May jumped by 400 billion yuan year-on-year. But to further break the numbers down, it can be seen that the increase was mainly supported by rising bill financing and short-term loans. Mid- to long-term personal loans plummeted by 340 billion yuan in May on a yearly basis while mid- to long-term loans by enterprises fell by 100 billion yuan year-on-year.

All these reflect that personal financing and enterprise financing show a lack of confidence in overall growth. Therefore, the major challenge posed to China at present is not inflation, but rather stabilizing market confidence and expanding domestic demand.

The property sector is facing great pressure this year, while local government income from property revenue has also dropped significantly on a yearly basis.

But the good news is that the issuance of special local government bonds has largely increased. By the end of June, up to 90.8 percent of the special bonds scheduled to be issued this year have completed issuance. This is in sharp contrast to the situation last year, when only 50 percent of the quota was completed by August 2021.

The acceleration of special bond issuances has allowed fiscal policies to provide more support to the real economy.

As this year's task for special bond issuances has been almost completely accomplished, there are three possible solutions if the government chooses to further strengthen fiscal policy support for economic growth. They can either bring next year's special bond quota to the remaining months of this year, or increase this year's quota. A third solution is to issue special treasury bonds.

However, due to the frequent disruptions that contagion resurgences have brought to business activity, local governments' balance sheets are also highly stressed. Under such circumstances, it is as yet unknown to what extent special bonds can support fiscal expenditures of local governments, as these bonds are designed for unique purposes.

In general, special bonds can help local governments expand effective investment and stabilize economic growth. But due to strict management regulations, it may take longer for investment projects to be approved with bonds still on hand. A bond's coupon should still be paid even when projects await approval. This is a huge waste of resources. Therefore, local governments should have a bigger say in terms of capital disposal for such bonds.

In terms of monetary policies, China is quite capable of adopting policies based on its own needs and conditions. The US Federal Reserve is still in the tightening process, which will result in an inverted interest rate differential between the US and China. But China's relaxed monetary environment is conducive to stabilizing market expectations and facilitating growth. Positive results can be anticipated from the relaxed measures. The tightening policies in the US are mainly aimed at taming inflation by sacrificing employment and growth. The US financial market will be thus more volatile, which can already be seen by recent stock market performance.

Under such a comparison, it can be seen that China's easing will not result in capital outflow or depreciation in the renminbi exchange rate. Solid proof of this can be seen in the foreign exchange market. When China announced on May 20 that it would lower the five-year loan prime rate by 175 basis points, the renminbi appreciated against the US dollar that day and the next, beating market expectations.

It is true that inflation has risen in China recently and may exceed 3 percent in certain months later this year. But overall inflation expectations are still stable. The major challenge that China faces now is a lack of confidence and lackluster domestic demand. Therefore, macroeconomic policies should continue to focus on stabilizing growth.

Source: China Daily

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Jason

Job creation continues to exceed expectations

The U.S. labour market continues to confound expectations with another very strong jobs print in July. This time non-farm payrolls rose 528k versus expectations of 250k while there were a net 28k of upward revisions to the previous two months of data. Unlike most activity data, which have typically disappointed over the past few of months, the U.S. payrolls number has beaten the consensus forecast for the third time in a row. More significantly it also means that all the jobs lost during the pandemic have finally been fully recovered with total payrolls at an all-time high of 152.54mn. U.S. Jobs Market Confounds the Sceptics With 528k Surge_1

U.S. Jobs Market Confounds the Sceptics With 528k Surge_1

There was strength throughout with private payrolls up 471k and government up 57k. All sectors posted gains with education & health particularly strong (+122k), leisure and hospitality up 96k and business services up 89k. Even construction (+32k) and manufacturing (+30k) were robust despite recent softness in activity numbers.

It doesn't end there. The unemployment rate fell to 3.5% from 3.6% while average hourly earnings accelerated to 0.5%MoM/5.2%YoY (consensus 0.3/4.9). The struggle of finding suitable workers was again illustrated by a decline in the worker participation rate to 62.1% from 62.2.

Gasoline price plunge to lift 3Q activity

Given the softer trend in activity and the fact that the U.S. is in technical recession – two consecutive quarters of negative growth – we doubt that this pace of employment growth can continue. Nonetheless, we have to acknowledge that the near-term economic story is looking pretty good with the substantial falls in gasoline prices likely leading to a 3Q rebound in activity.

Having peaked above $5/gallon in June the national average price for gasoline is down at $4.11 today with the recent declines in oil prices suggesting we could see gasoline dropping to $3.80/gallon in the next ten days or so. This boost to household finances can lift both sentiment and spending and already appears to be translating into greater movement around retail and recreation. With inventories and trade also supporting activity we look for 3Q GDP to come in around 3% annualized.

A third 75bp hike is possible...

Meanwhile, next week's CPI report set to show core inflation rising back up to 6% and with employment growth set to continue, albeit not at half a million jobs a month, it is likely that market momentum will inevitably swing towards a third consecutive 75bp hike.

However, there is still a lot of data to come between now and the September 21st FOMC meeting so for now we are happy to stick with out 50bp September, 50bp November and 25bp December Fed hike call.