The United States raises rates and China loses its attractiveness

In Europe, all monetary and regulatory authorities, as well as presidents and prime ministers, respectively, insist that there will be no contagion effect from the particular situation of a group of US banks. 

What is a fact is that the situation on the other side of the Atlantic is creating a tsunami of unrest that is not good for stock market operations, which are so sensitive to any rumour or negative number.  In just four days (15, 16, 17 and 20 March), six Spanish banks listed on the IBEX-35, including BBVA, Banco Sabadell, Banco Santander, Caixabank, Bankinter and Unicaja, have lost a combined total of 25.3 billion euros on the stock market. 

The situation of Credit Suisse, considered a systemic bank, which for years has been facing a series of problems ranging from reputational to balance sheet problems, has also hit hard, and last year presented losses of 7.4 billion euros. 

On 15 March, the Swiss central bank and the Swiss regulator FINMA announced a CHF 50 billion backing for Credit Suisse, which four days later was sold to UBS for CHF 3 billion; in addition, the Swiss government decided to back Credit Suisse with guarantees of CHF 100 billion.

The European Central Bank (ECB) has also made a move and is trying once and for all to put out the fire by announcing that it will inject all the liquidity needed by banks. Nor has it hesitated to continue raising interest rates, this time from 3 to 3.50%. 

This was not the only move.  The intention is to extinguish the flames of unrest and, by means of a press release on Sunday 19 March, the ECB led by Christine Lagarde issued a statement that reveals the current situation: six central banks have coordinated to provide their respective credit institutions with more liquidity, via SWAPS in US dollars, whose maturities change not weekly but daily, in order to provide them with all the liquidity they need for their operations.

Such action speaks to the delicate situation because a bank failure with contagion effect is undesirable. To calm nerves, the Federal Reserve, the Central Bank of Canada, the ECB, the Bank of Japan, the Swiss Central Bank and the UK Central Bank have coordinated. 

What does this important move mean? According to Mariano Sardáns, this action had already been done in 2008-2009 and even the Central Bank of Brazil and some others were incorporated on that occasion. They are basically pipelines, direct pipes, to the central banks of those countries so that their respective banking systems can access dollar lines. 

"Instead of money going from Europe to the United States; or from Japan to the United States; from Canada to the United States; from Switzerland to the United States. Banks can directly give dollar deposits to their own clients through the federal reserves or the central banks of their countries," explains Sardáns.

For this market expert, CEO of the financial asset and wealth management company FDI and director of Fiduciary Services, whenever there is a banking and real estate crisis, people seek refuge in short US dollar-denominated bonds. 

The latest moves by the six central banks, he says, will change the market because it ensures ample liquidity for banks against any setbacks.  "The system is not going to collapse because people eventually move money from one bank to another bank and that is what is happening in the US".

"In Manhattan, people are aware, but they are not worried, because they know they have the backing of the US government behind them.  If there is panic, let's say it starts to calm down because there comes a time when people are going to turn from a small regional bank to a large bank; now, when people realise that this small regional bank is fully funded by the Federal Reserve, this movement does not make sense," he says.

Sardáns has studied at the University of Berkeley and has lived for several years in the United States. He runs a firm focused on wealth management with several branches not only at its headquarters in Uruguay, but also in other countries in Latin America, the United States and Europe. And he tells me he is convinced that monetary policy in the United States will continue with the upward adjustment in interest rates, despite the recent noise in the banking system, because inflation has to be lowered.

In Europe too, Sardáns adds, interest rates need to continue to rise: "Lagarde has said it, they need to lower inflation and strengthen the euro. Europe is a net importer of primary products, of commodities that are priced in dollars, so, by raising interest rates, the euro is strengthened and Europe spends less euros to import its goods, which lowers the inflation rate".

How will this path of rising rates continue to impact? Sardáns points out that each country will feel the consequences in different ways; for example, in Europe, unlike the United States, more than 90% of families have variable rate loans and in the United States, after the 2008 crisis, most people are on long-term fixed-rate loans.

China is losing its attractiveness as an investor

Because of his business activity, Sardáns has to be in constant contact with the reality of international markets, the situation of investment funds, movements in economic policy and monetary policy and, of course, other variables that have gained enormous specific weight among investors and savers, as has recently happened with the pandemic and Russia's invasion of Ukraine.

Both the United States and China blame each other for being responsible for unleashing the coronavirus pandemic (whether accidentally or deliberately) and without reliable scientific answers as to how SARS-CoV-2 came about, the only thing left is to find out which country has been the main beneficiary of the pandemic. For Sardáns, it has not been China. 

"In 2020, at the beginning of the pandemic, China did not close down like the rest of the countries and then it made these "lockdowns" from 2021 onwards and began to close ports, communications, to cut off its customers worldwide; and this led to it being seen as an unreliable supplier that could not deliver goods on time and in the right way", the expert stresses.

It was also the last country to open its border just a couple of months ago and, to a large extent, says Sardáns, it has become clear to everyone that China is an autocracy and its individual freedoms are suddenly worthless.

"What we are seeing with China is that a large part of the multinationals are starting to source from outside China; then came this Russian invasion of Ukraine and China's flirtation with a possible invasion of Taiwan. This has provoked a great deal of fear on the part of companies worldwide because it has been feared that the West, especially the United States, would boycott Chinese products. So we have been seeing for months now how companies are looking for other suppliers outside China," he explains in detail.

The first to benefit from the proximity and the port system is Vietnam, then India, Malaysia and even countries like Mexico are benefiting because products that used to be made in China are now labelled as made in Mexico. 

"China was the great supplier of global disinflation in the last 40 years, for every company that had Chinese suppliers, prices went down every year; and now, a characteristic of the Chinese is that, in recent years, despite the rise in all commodities, the Chinese did not raise prices, they absorbed them," he says. 

Do some people see China in crisis?

Today China is in a crisis, there is a group of foreign people in China who cannot withdraw their money, because of different bureaucracies that are imposed on them, but, in the end, there is an internal problem. At the same time, in 2021, foreign companies said that the order was that nothing more should be put into China... what can be taken out... is taken out, and if not, it will be taken out and disinvested over time, but nothing more is put in. 

Geopolitics of impact

From Uruguay, Sardáns comments that geopolitical movements are becoming very big: "It's a complicated situation, today China has another problem as a result of these lockdowns, and that is that Chinese millionaires are relocating to Singapore; and it is also losing its brains, the people who add value and can produce cutting-edge technology for its military industry".

How does geopolitics operate here?

The West is blocking China's "generation six microprocessors". The only factory in the world for this "generation six" is Dutch and since the time of the Trump administration it has been banned from selling this technology.  And all the semiconductor companies like Intel and the Taiwanese companies that were producing in China went out and disinvested.  Today, China is a generation behind in technology.

The financial advisor refers that it is more or less the same strategy that was carried out with Russia, in 2014, after the invasion of Crimea; precisely, it started to suffer a series of boycotts of access to cutting-edge technology that Russia uses for its military industry.

"That's why we see today how Russian weaponry compared to Western technology is at such a disadvantage because it is working with three or four generations of technology," Sardáns points out.

Can we say that both the pandemic and the war are affecting China?

"Yes, both are contributing to China's slowdown... China has been one of the big losers in the pandemic. Absolutely. China has had a structural and demographic issue for many years, today the Chinese population is declining and although its balance of trade was positive, with the balance of payments all the money was going to the West, mainly to the United States," he adds.

On the subject of debt, Sardáns explains that, at the time, China was the United States' largest holder of debt "because it had no other choice", but it is not that the United States depended on China, quite the contrary. There is, he insists, no other instrument with such a level of liquidity as Treasury bonds.

"In recent years, China has been selling part of these positions because it has intervened on several occasions in the foreign exchange market; it has gone out to sell securities to defend its local currency, which is the yuan," he says. 

According to the Treasury Department, China's holdings of US government debt fell to their lowest level in thirteen years amid the rate hike scenario. "China holds $859.4 billion in US Treasury securities, as of last January; this is its lowest point since 2009."