Jul 8, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

Good morning! Was this email forwarded to you? Sign up here. (Today's Smart Brevity count: 1,133 words, 4.5 minutes.)

🎙 “Being champion is all well and good, but you can't eat a crown." - See who said it and why it matters at the bottom.

1 big thing: What China's uneven recovery means for the U.S.

Adapted from Institute of International Finance; Chart: Axios Visuals

China and much of Southeast Asia look to be bouncing back strongly from the coronavirus pandemic as stock markets and much of the country's economic data are returning to pre-pandemic levels.

What's happening: "Our tracking points to a clear V-shaped recovery in China," economists at the Institute of International Finance said in a note to clients Tuesday, predicting the country's second quarter growth will rise above 2% after its worst quarter on record in Q1.

  • "The manufacturing recovery appears complete and exports also normalized."

By the numbers: Investors have responded by sending Chinese stocks skying — the CSI 300 index of Shanghai and Shenzhen-listed shares jumped as much as 5.7% on Monday, the biggest daily gain since February 2019 (thanks in no small part to urging from the Chinese Communist Party encouraging retail investors to buy stocks).

  • And while U.S. shares retreated on Tuesday, the CSI 300 touched a new five-year high, and rose again on Wednesday.
  • The CSI 300 is up more than 15% in local currency terms year to date, and over 18% since June 1.

Yes, but: While Chinese services sector data has rebounded, according to official and private sector data, IIF economists warn, "Consumption is still heavily disrupted. Retail sales are significantly below pre-COVID-19 levels and look U-shaped at best."

Why it matters: Many in the U.S. have looked to China as a model for an eventual U.S. rebound, but the details of China's recovery belie that hope.

  • In addition to China's ability to contain its coronavirus outbreak much more quickly and effectively, manufacturing makes up nearly 30% of its economy, compared to around 10% for the U.S., according to the latest data from the World Bank.
  • Services, driven by things like retail sales and restaurants, make up a little over half of China's GDP versus more than three-quarters of GDP for the United States.

Between the lines: China's manufacturing also has been heavily supported by government stimulus — IIF estimates fiscal stimulus could add up to 7% to 9% of GDP, or $1 trillion to $1.3 trillion — and the growth of medical supply sales as a result of the pandemic.

The big picture: The key to a U.S. economic rebound will be a sustained revival in services — but data show that even in countries that were hit early and quickly contained their outbreak, recovery has been slow and incomplete in that sector.

2. Catch up quick

Big Tech companies including Google, Facebook and Twitter have suspended processing requests for user data from Hong Kong law-enforcement agencies in response to China’s national-security law. (WSJ)

Top advisers to President Trump have suggested the U.S. undermine the Hong Kong dollar's peg to the U.S. dollar as a way to punish China. (Bloomberg)

Hours after the SBA released the names of Payroll Protection Program recipients, several well-known companies and investment firms on the list denied that they had ever applied for PPP loans, let alone received them. (Axios)

AMC Entertainment is nearing a restructuring deal to stave off bankruptcy and plans to turn down a competing financing offer from senior lenders including Apollo Global Management. (WSJ)

3. Fed index shows growing weakness in recent economic data
Data: New York Fed; Chart: Axios Visuals

The New York Fed's collection of real-time data indicators contributing to U.S. GDP growth showed a decline, reaching -7.35% for the week ended July 4, down from -6.81%.

What it means: The WEI is an index of ten daily and weekly indicators of real economic activity, scaled to align with the four-quarter GDP growth rate, according to the New York Fed.

Yes, but: "Upward revisions are likely as more data become available," the Fed notes.

4. The myth of closing the racial wealth gap through entrepreneurship

Adapted from Federal Reserve Bank of Atlanta; Chart: Axios Visuals

Entrepreneurship or starting a business has often been heralded as a way to reduce the U.S. racial wealth gap. However, Black Americans' attempts at entrepreneurship are often foiled by an initial lack of capital and an inability to obtain financing, especially through government programs.

  • This was most recently evidenced when Black-owned small businesses were largely shut out of financing from the SBA's Payroll Protection Program.

What's happening: A 2017 report (the latest available) from the Department of Commerce's Minority Business Development Agency (MBDA) found...

  • Minority-owned businesses pay higher interest rates on loans than white-owned businesses.
  • Further, minority-owned firms have less than half the average amount of recent equity investments and loans than white-owned firms, even among those with $500,000 or more in annual gross receipts.

By the numbers: According to the Federal Reserve Bank’s 2016 report on minority firms, "40% of firms owned by people of color received the full amount of capital sought, compared to 68% of nonminority-owned firms."

  • "Black-owned firm application rates for new funding are 10 percentage points higher than white-owned firms, but their approval rates are 19 percentage points lower."
  • "Forty percent of nonapplicant Black-owned firms did not apply for financing because they were discouraged (i.e., they did not think they would be approved), compared with 14% of white-owned firms and 21% of Hispanic- and Asian-owned firms."

One level deeper: The Atlanta Fed's 2019 report on minority-owned firms found that even though Black-owned businesses were the highest percentage of firms expecting revenue growth and employment growth over the next 12 months, they were significantly less likely to get loans.

  • In 2018, 81% of Black-owned businesses expected to see revenue growth in the next year compared to 72% of white-owned firms.
  • Black-owned businesses also saw the most significant growth in share of firms that went from breaking even or operating at a loss to making a profit between 2016 and 2018.
  • And 60% of Black-owned firms expected to increase employee headcount in the next year, compared to 43% of white-owned firms.

Reality check: "A review of national and regional studies over several decades indicates that limited financial, human, and social capital as well as racial discrimination are primarily responsible for the disparities in minority business performance," the MBDA's report finds.

5. Americans are spending less because of tariffs

Data: CivicScience; Chart: Axios Visuals

While the U.S.-China trade war has drawn fewer headlines in recent months, nearly seven in 10 Americans say they are concerned about how tariffs are impacting the cost of things they purchase.

  • That's the same number registered in March when the coronavirus pandemic began to escalate in the United States.

Why it matters: Despite record low interest rates and trillions of dollars in stimulus from Congress and the Fed, everyday Americans say they are pulling back spending, with 28% saying they are buying less than they used to because prices had increased.

  • That number is up from 19% a year ago, according to data from CivicScience, first to Axios.

The big picture: Concern about tariffs overall has risen notably since 2019.

  • "Consider that, when comparing this to concern about tariffs a year ago, when CivicScience started tracking the topic, things have increased pretty dramatically," CivicScience analysts note.
  • "In June of 2019, 61% of American adults were at least somewhat concerned about tariffs, so eight percentage points lower than it is in June 2020."
Dion Rabouin

Thanks for reading!

Quote: “Being champion is all well and good, but you can't eat a crown."

Why it matters: On July 8, 2000, Venus Williams won the Wimbledon Tennis Championship, becoming the first Black woman to win Wimbledon since tennis pioneer Althea Gibson won the tournament in 1957. (The quote is from Gibson.)

  • Unlike Williams, Gibson, known as the Queen of Tennis, was not able to parlay her tennis success into wealth because there was no prize money at major tournaments and direct endorsement deals were prohibited by the USTA.
  • Later in her life, Gibson suffered two cerebral hemorrhages and a stroke and her medical expenses left her unable to pay for her rent or medication. She was left largely penniless until former doubles partner Angela Buxton raised nearly $1 million in donations from around the world.