Global rate cuts open doors for emerging markets: China in the lead

Editor's note: Jimmy Zhu is the chief strategist at Fullerton Research. The article reflects the author's opinions and not necessarily the views of CGTN.

As global economic conditions continue to shift, investors are increasingly looking beyond traditional markets for opportunities. In the face of slowing growth in the U.S. and other advanced economies, emerging markets are becoming an attractive alternative. With global rate cuts on the horizon and proactive fiscal and monetary policies in place, countries like China are positioning themselves as key destinations for international capital.

The U.S. economy is facing increasing signs of a slowdown, with both the labor market and inflation showing signs of cooling, and further rate cuts by the Federal Reserve are widely expected heading into 2025. One key factor weighing heavily on the Federal Open Market Committee's (FOMC) decision-making is the ballooning U.S. debt, which has reached historic levels, adding to economic concerns.

The FOMC began its easing cycle with a 50 basis point cut, marking a shift in policy from the aggressive tightening seen throughout 2022 and 2023. The decision came as new data shows clear signs of economic deceleration. The U.S. unemployment rate rose to 4.2 percent in September 2024, up from 3.6 percent in December 2023. This uptick signals a softening in the labor market, with employers hiring at a slower pace amid economic uncertainty.

Inflation has also cooled, with the Consumer Price Index falling to 2.4 percent in September, down from 3.4 percent in December 2023. This reduction in inflation suggests that the Fed's efforts to tame price pressures are bearing fruit, but it also raises concerns about demand slowing too quickly.

One of the central issues driving the Fed's cautious approach to rate cuts is the nation's growing debt burden, which has been neglected by many market participants. According to Fiscal Data, an official U.S. government website, total U.S. debt has now reached $35.46 trillion in 2024, a record high. This enormous debt load is exerting pressure on the Fed to ease monetary conditions to ensure that interest payments on the national debt remain manageable and do not stifle economic growth further.

As the U.S. government continues to borrow heavily to fund its operations, the cost of servicing the debt rises. If interest rates remain too high, the burden of debt servicing could consume a larger portion of the federal budget, leaving less room for spending on critical areas like infrastructure, education, and healthcare. Thus, managing this debt is becoming a key factor behind the Fed's decision to gradually lower interest rates.

Even in the face of a further economic slowdown, Fed officials are expected to maintain a gradual approach to interest rate cuts in the near term, signaling a cautious stance. This measured approach may reduce the appeal of U.S. assets for global investors who had been expecting more aggressive monetary easing to support growth.

Recent comments from top Fed officials have reinforced this position. Lorie Logan, president of the Dallas Fed, emphasized on October 9 that after the recent half-percentage-point rate cut, a more "gradual path" to policy normalization would likely be appropriate unless economic conditions deteriorate sharply. This indicates that the Fed is not inclined to respond to a potential slowdown with swift or aggressive rate cuts, like the 50-basis-point reduction seen in September.

Susan Collins of the Boston Fed shared similar sentiments on October 8, stressing a "careful, data-based approach" to policy normalization. She noted the Fed's responsibility in balancing the risks of both inflation and slower growth, highlighting that incremental policy adjustments are the preferred course for now.

This cautious tone, shared by several key policymakers, suggests that even with slower growth on the horizon, aggressive rate cuts are unlikely. Instead, the Fed is more inclined to make smaller, incremental adjustments, focusing on long-term stability rather than short-term stimulus.

For global investors, this could reduce the attractiveness of U.S. assets, particularly when other central banks like European Central Bank may adopt more aggressive easing measures in 2025. A slower pace of rate cuts may lead to a less competitive environment for U.S. assets, while a cooling economy could dampen the prospects for U.S. equities. As a result, capital inflows to U.S. assets may weaken, as investors seek higher returns and faster growth elsewhere.

China emerges as leading investment opportunity

In contrast, China is well-positioned to benefit from the global shift in capital flows. Historically, emerging markets have attracted increased investment during periods of global rate cuts, as lower rates in advanced economies often drive capital into higher-yielding, faster-growing regions. This time, China stands out as a key destination for global investors.

The People's Bank of China, the country's central bank, has been more proactive in easing monetary policy to stimulate growth. In addition to cutting interest rates, the central bank has implemented liquidity measures such as money market injections and a Reserve Requirement Ratio cut. On October 10, the central bank launched a 500 billion yuan swap tool, allowing qualified financial firms to swap government bonds or central bank bills for corporate bonds, stocks, or exchange-traded funds, further supporting the capital markets.

China's fiscal policy has been equally proactive, with the government rolling out stimulus measures aimed at boosting infrastructure investment, supporting key sectors such as technology and green energy, and encouraging domestic consumption. These initiatives are helping to foster a more favorable environment for corporate earnings growth, which could lead to stronger stock market performance in the months ahead.

What makes China particularly attractive to investors is its relatively low stock market valuations. After a challenging period marked by regulatory tightening and economic slowdown, Chinese equities are now trading at some of their lowest levels in years. For investors seeking value, the country offers a promising opportunity, especially given the supportive policy environment.

As global rates are expected to continue declining, China's proactive policies, combined with its economic stability, are likely to attract more capital inflows. Emerging market assets, including those in China, present an attractive alternative for investors looking for higher returns and faster growth compared to U.S. and other developed market assets.