Letter From Shanghai No 838 - Bread And Taxes

There can be little to do this morning but survey the damage so far. Overnight, US equities closed sharply lower; the S&P fell around 1.84% to 4225 to close at its lowest level in about 8 months, as investors considered the Ukraine crisis and its effects on USD inflation. Moscow began evacuating its Kyiv embassy and Ukraine’s parliament declared a state of emergency. In Chicago, wheat futures hit a 9 year high as Russia and Ukraine supply around 30% of the world’s wheat exports, low inventories in the US and Canada due to drought conditions exacerbate the move and inflationistas must consider rising bread prices are a real possibility.

The Rouble is trading at USD RUB 81.53 this morning and the Moscow Exchange is yet to open following its public holiday closure yesterday. Russian inflation is running at 8.7%, The Central Bank of Russia benchmark is at 9.5% and the Central Bank is signalling it may move higher to between 9-11% to contain inflation.

However, looking away from the geopolitical tension perhaps there is more going on. Since the Black Monday stock market crash of 1987, the market has expected the Fed to offset instability by cutting the?Fed funds rate and putting its big safety net under investor sentiment. We have seen this policy reprised in 2008 and more recently during the pandemic. However, these actions were taken within a modest or low inflation environment. While no one knows what the Fed will do, including the Fed itself it would seem, let us ask ourselves, how far down does the stock market have to go before the Fed acts to improve investor sentiment. Hmmm, that’s not so easy to answer. And that’s the problem, there is a whole generation of US investors nervously wondering, where is the Fed put?

Whereas here in China, the ground is being prepared for the Two Sessions and the policy structure that is emerging. In a commentary from Xinhua, “China will see a larger scale of tax and fee cuts this year,” Minister of Finance Liu Kun told a press conference, citing that the country had already cut about 1.1 trillion yuan (about 173.9 billion US dollars) of taxes and fees in 2021. Xu Hongcai, Vice Minister of Finance commented “The implementation of tax and fee cuts policies has reduced the burden on market players and strengthened their resilience”, “To further vitalize market entities, this year the country will intensify tax-deduction efforts and launch targeted support measures while focusing on the high-quality development of the manufacturing industry, smaller businesses and scientific innovation. Preferential tax measures should move in tandem with other proactive fiscal, monetary and industrial policies to help market players tide over difficulties”. Xu noted that amid the tax and fee cuts, the growth of local-government revenue will slow down, indicating that Beijing will significantly increase transfer payments to local governments, targeted to flow to less developed regions and those where fiscal revenues face mounting pressure from tax and fee cuts.

So, no QE Fed style monetary easing, tax and fee cuts that target specific regions and industry groups is the way to go in China.??

Have a good day,

John?