Global Debt At Risk Of “Qualita ve Change

GLOBAL DEBT AT RISK OF "QUALITATIVE CHANGE"

Global markets, spurred by policies, have emerged from the March panic during the spread of the COVID-19 pandemic. For now, all major economies, including Europe and the United States, are at the crossroads of a new direc on. Although the U.S. stock market experienced a certain degree of correc on in October and began to hover around high levels, it is s ll far from the all- me high it reached in early September. In the current stock market, the global market is s ll plagued by two factors, i.e., the recurring COVID-19 pandemic and a new round of s mulus policy changes. In fact, in the case of the second outbreak of the pandemic, there was no obvious fluctua on in the market, which meant that the capital market s mulated by the policy could hardly get rid of its dependence on the policy. This kind of policy risk that accumulates ceaselessly in the long run also implies the possibility of "qualita ve change". In the bond market, there have been signs of a pullback as the dollar index has been fl ooded with dollar liquidity. In the United States, investment-grade corporate bonds with maturities of more than 10 years underperformed short-term bonds last month and fell the most in August of all maturi es, according to Bloomberg Barclays Indices. In the options market, the cost of hedging against inflation of more than 2% over the next fi ve years has more than doubled since February. In Asia, dollar-denominated corporate securities with maturities of more than 10 years performed worst in the two months to September. Some bond markets around the world have begun to signal long-term infl a on risks, reflecting growing concern that a prolonged flood of liquidity might drive up future infl a on, with the resul ng change in interest rates that could be poten ally disastrous for capital markets. Reports from international rating agencies have further heightened concerns about the future situa on. S&P Global warned that the second

wave of sovereign downgrades could come in the coming months as a result of the new wave of the pandemic, with some of the world's top economies likely to suffer credit downgrades or downgrade warnings. S&P has already downgraded the ra ngs or outlooks of nearly 60 countries this year. Some of the world's developed economies, including the European Union, Japan, the United Kingdom, and the United States, are also at risk from a new wave of the pandemic. S&P has revised its outlook for Japan from posi ve to stable. Canada's rating was also downgraded to AA by Fitch. These changes suggest that while countries are expanding their fi scal defi cits to cope with the pandemic, the long-term sovereign debt problem is worsening. In par cular, the size of the U.S. debt has ballooned to more than USD 20 trillion from about USD 13 trillion fi ve years ago, and the na on's latest annual fi scal defi cit has hit a record USD 3.1 trillion. The economic impact of COVID19 implies that the scale will inevitably

Founder of Anbound Think Tank in 1993, Chan Kung is now ANBOUND Chief Researcher. Chan Kung is one of China’s renowned experts in informa on analysis. Most of Chan Kung‘s outstanding academic research ac vi es are in economic informa on analysis, par cularly in the area of public policy. Wei Hongxu, graduated from the School of Mathema cs of Peking University with a Ph.D. in Economics from the University of Birmingham, UK in 2010 and is a researcher at Anbound Consul ng, an independent think tank with headquarters in Beijing. be further expanded. In recent days, Randal Quarles, the Fed's Vice Chair for Supervision, said the Treasury market is so large that the Fed may have to stay involved to keep it func oning. Quarles also said that the Treasury market’s scale has grown so large that it may have outpaced the ability of the private sector to cope during periods of stress. This means there is an “open ques on” about whether there will be an indefi nite need for the Fed to par cipate as a purchaser to support market func oning, a ques on that according to Quarles, has yet to arrive at an answer on. The Fed is also stressing that the future of the U.S. economy depends on another round of fi scal s mulus. The Federal Reserve and the U.S. government are likely to continue their massive easing policies in the face of rapidly ballooning U.S. government defi cits. In Europe, the E uropean Central Bank (ECB) has begun to note the threat posed by the build-up of corporate debt risks in the future and has stressed the ECB's policy role, hoping to allay market fears. For the fi nancial market, although continuous easing policies are conducive to maintaining market stability, it also means that the capital market is increasingly dependent on policies, and it is diffi cult for the capital market to form its own endogenous growth momentum. The con nued spread of the pandemic will further aggravate this "vicious circle". If capital markets are losing their func on, policymakers need to consider the possibility of a future qualita ve change in growing government and corporate debt that could cause markets to stall and the global economy to reboot. The only hope for governments and regulators is that the economy recovers its momentum before the crisis occurs. Final analysis conclusion: At present, the massive s mulus policies adopted by countries in response to the pandemic and economic recovery will con nue to strengthen in the short term, making the capital market increasingly dependent on policies. As emergency policies con nue to trend towards the long-term, the capital markets are facing the threat of losing their func on, raising the risk of a " qualita ve change" in the overall debt problem.