Stocks and bonds both fell for the week as healthy economic data drove the narrative that the Federal Reserve will keep interest rates higher for longer. Among the major stock market indices this week, the S&P 500 posted a 2.1% decline to its lowest level in nearly eight weeks, the Dow Jones dropped 2.2% for its biggest weekly loss since March, and the Nasdaq Composite slid 2.6% to a 10-week low. 

For those predicting a soft landing for the US economy, the runway may be getting close. Economists are growing more optimistic as inflation cools without doing much damage to the labor market. This sunny economic state of affairs for America is the opposite of what arch rival China is going through. Confidence in the world’s second largest economy is slumping as authorities frantically step up efforts to bolster financial markets.

Will China’s meltdown start a global contagion?

Future Wealth’s View

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.

China is in a predicament and the property market stands at the heart of its troubles. Construction accounts for as much as a quarter of China’s gross domestic product, but real estate reverberations are shaking up confidence and many are afraid about effects on the overall economy. Housing sales, prices and investment are falling, while a deflationary spiral threatens to fuel an even bigger disaster.

Just last week, we had stated in our report that “It is fully possible that China may be entering its lost decade(s) like Japan”. Link to the article is here – Here is the reality of the situation in China – deflation could beget deflation expectations, which may see demand suffer as consumers hold off on more purchases. Businesses would also make less revenue if they cut prices, meaning fewer jobs and reduced wages, and eventually lower consumption. Such a death spiral could mean China slumps into an abyss that Japan has tried getting out of for the past 20 years.

A fall from grace is what Xi Jinping needed after years of authoritarian rule and trying to make himself the next Mao-Tse-Tung and have his poster beside Mao on the walls of the Forbidden City. He is not getting it and no one is going to shed a tear.