Yahoo Finance How a China slowdown could mess with the Fed’s plans
While the market’s focusing on the Federal Reserve’s rate decision, China is still looming. And with a big White House visit by President Xi planned for next week, Donald Trump, Scott Walker and others made sure to mention the China effect at Wednesday night's debate.
While the rhetoric is rising in the U.S. concerning China, its economy’s slowing. And Kathy Boyle, President of Chapin Hill Advisors, tells Yahoo Finance that's a concern for more than just Beijing.
“China is weighing on the market. They have 1.3 billion people - it's a very large economy, they are going to continue to grow; however, they have a very big split between very small number of people with money and a very large population with no money and no access,” notes Boyle. “[China’s] economy, even if it slows, is still going to grow at 5 - 6%,” she predicts, but despite that growth figure, “they are trying to keep their markets from falling apart.”
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In the West, there's one thing everyone’s afraid of coming from China - contagion. “There is a risk of global contagion - China falls apart, the U.S. market falls apart,” Boyle says. With the Fed trying to leave its zero interest rate policy behind, this puts Yellen and company in a box as to what they can do to respond, especially if China continues to sell Treasuries.
“China buys a huge number of our Treasuries - they are the biggest buyer of our Treasuries and they liquidated almost a $100 billion worth of bonds in the month of August in order to get some cash to put money in,” she says. “So that is a big weight and that is the reason why some people think that the Fed may do QE4, they may have to step in and create some kind of bond buying program to pick up the slack from China.”
From an investor standpoint, in the short term Boyle is advising clients to invest in places like India for those looking for exposure to the emerging markets. As far as policymakers here, from the White House to the Fed, there’s only so much they can do to contain the impact of a slowing China.
“it's not like we can go over there and fix it,” Boyle says matter of factly. “It's just a matter of reacting; how long will the Fed try to keep rates low to try to stimulate something here to offset the effect of a China slowdown?”
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