Risk and Diversification in a Global Economic Downturn
There have been concerns about a global slowdown since the end of 2018. The International Monetary Fund attributes the possible slowdown to factors including monetary policy normalization by major central banks，Britain's withdrawal from the European Union，the Sino-US trade dispute and the worldwide rise of protectionism. Economic performances have borne out most of these concerns. In the US，many economists see a downturn ahead，though by and large the prospect of a recession is remote. China has adjusted its plans for the economy and set an agenda of "six stabilities" to avoid disruptions in employment，finance，foreign trade，foreign capital，investment and market expectations. Other economies have signaled downside risks as well. Unexpectedly，the US dollar index has been rising since the beginning of 2019，despite signals of monetary easing from the US Federal Reserve. How should the combination of a US downturn and a stronger US dollar be perceived? What can we expect for the renminbi，as well as of other asset prices，in 2019?
Moderator: Zhong Wei，deputy editor-in-chief of China Forex
Panelists: Zhong Zhengsheng，chairman and chief economist of Monita Research，Caixin Insight
Deng Haiqing，chief economist of Wall Street News
Zhong Wei: First，I'd like to welcome our two guests to this roundtable discussion. For the global economy，a slowdown is almost certain in 2019，but what about a recession? There are different opinions. International Monetary Fund Managing Director Christine Lagarde warned of a "storm" and cited what she called "four dark clouds" as the main factors undermining the global economy. These are trade tensions and escalating tariffs，financial tightening，uncertainties related to Brexit and a sharper slowdown of the Chinese economy. According to the IMF chief，indecision on structural reforms and inappropriate macro regulations may lead to a world economic slowdown. However，Fed Chairman Jerome Powell says there is no "elevated" risk of a US recession. In Europe we see a four-year low in consumer confidence while in Japan there is a sixth consecutive year of limited growth，and in China，there is a potential adjustment to what is described as a "proper" growth range. In your view，are we heading for a recession，or just a slowdown? Are we seeing an increasing divergence of growth in key economies? And what do you see for the Chinese economy?
Zhong Zhengsheng: In my opinion，the world economy will slow in 2019，but it is not heading towards a recession.
The weakening of the US economy，which began in 2018，is largely a result of interest rate hikes by the Fed and the gradual unwinding of the US central bank's balance sheet assets. However，there has been a significant shift of FED monetary policy as of January. The FED will be more patient about raising interest rates，and may be moving closer to ending its balance sheet reduction. Thanks to the policy shift，US Treasury yields remain low at around 2.7% and there is less pressure on the housing market. At the same time，US stocks have rebounded sharply since the beginning of this year，mitigating the potential impact of a slide in consumption and investment. It is reasonable to say that risks to the US economy have decreased as the Fed softens its stance on monetary policy. This can be demonstrated by the following:
First，according to The Economist，the US housing market is not in the danger zone. Housing starts declined 22% on average in the four quarters before the previous US recessions from 1960 to 2007. However，the drop in housing starts over the last four quarters was only 3.6%. Second， since 1975，each time the yield on the 10-year US Treasury bond fell below the two-year Treasury yield，a recession followed. On average，the yield curve remained inverted for 627.2 days before each of the five recessions over that period. At this point in time the yield curve has not yet inverted so it is not likely that we will see a recession in 2019. That is also the case with the world economy. Data on debt and leverage do not point to a recession. As far as China is concerned，the downward trend will continue in 2019，and economic growth is likely to be around 6.2%，assuming there is progress in the Sino-US trade negotiations.
Deng Haiqing: Global growth has been decelerating since the fourth quarter of 2018. In the US，economic data have painted a mixed picture. The effect of the 2017 tax cut has faded and the adverse effects of trade friction and interest rate hikes by the FED have already become apparent. Indicators show Japan's economy has weakened again since 2018. Gross domestic product growth and the Purchasing Managers' Index for manufacturing have been on a downward track. Inflation has begun to turn down since the fourth quarter of 2018. In Europe，inflation has fallen from its highs，economic growth has turned lower，and the index of manufacturing activity has slipped into negative territory. What is worse，the rise of populism，a recession in Italy and uncertainty over Brexit will also be a drag on economic growth. Overall，the risk of a global recession may be low in the short term，but we are heading for a slowdown. There will be further efforts to counter globalization in 2019 and income disparity is likely to worsen.
As for the Chinese economy，the central bank responded to downward economic pressure by ensuring reasonable liquidity through loose monetary policies in 2018. China has also worked to ensure that monetary easing turns into ample credit by improving the policy transmission mechanism. Authorities have made the funding needs of private enterprises，including small and micro businesses，a top priority. If their efforts succeed，there is a chance of an upturn similar to what we saw in 2012 and 2016. If there is no easing of credit，a downturn is inevitable.
Zhong Wei: The price trends for gold and bulk commodities have diverged since the end of 2018. Gold's price rise has been accompanied by an increasing interest in gold purchases by major central banks. Oddly enough，the US dollar index，after a slight fall，has moved higher in 2019 despite mounting concerns about political and economic problems in the US. The House and the Senate are controlled by two different parties and the political divide has widened significantly. Economic growth is slowing. And the Fed has become much more willing to wait and see before raising interest rates and trimming the size of its balance sheet. Against this background，will the strong dollar last? Do you think the price of gold and the US dollar can rise at the same time?
Zhong Zhengsheng: The dollar's strength since the beginning of 2019 has been due in part to the sharp decline of the euro as a result of a surprisingly weak economic performance in Europe，especially Germany. Additionally，the Fed has turned out to be surprisingly dovish，despite market concerns in the recent past that monetary normalization would hurt the US economy. Looking ahead，the dollar is unlikely to move much higher because so much has been priced in by the market. However，the relatively good economic performance of the US will help postpone a bigger decline in the dollar to at least the second half of 2019.
As for gold，I do not think the price uptick can coexist with a rising US dollar. The dollar drifted backwards at the end of 2018 and this created some safe haven demand for gold. But a strong dollar will drag down the price of gold at some point，so the US currency's more recent advance is not good news for gold.
Deng Haiqing: There have been signs of an easier bias to US monetary policy. The first Federal Open Market Committee meeting in 2019 suggests that the Fed will hold off on any more interest rate hikes. Moreover，another round of quantitative easing cannot be ruled out. The general strengthening of the US dollar since 2018 is partly due to unreasonable expectations of a US economic recovery and a European downturn. With the recent economic adjustments and shifts in monetary policies，there is little chance of a stronger dollar in the year ahead. It is more likely to move lower but with periodic fluctuations.
As for the gold price，it is mainly determined by real interest rates，the dollar index and hedging demand. The likely downswing in the global economy and real interest rates in 2019，plus the depreciation of the US dollar as I just mentioned，will support the price of gold.
Zhong Wei: China's economy is facing challenges in 2019. Amid pressure from the trade dispute with the US，the current account surplus has been narrowing thanks to the further opening up of the economy. At the same time，the international investment picture has remained fairly steady. Domestically，China has been experiencing downward economic pressure，and that adds to pressure for a further upgrading of the economy. It also