Cathie Wood Unravels Fed's Domino Effect Breaking China And Triggering Global Deflationary Bust: 'Rapid Growth Can Cover Many Economic Sins'

Ark Investment Management CEO Cathie Wood said late Monday that Federal Reserve's continued rate tightening will lead to deflation-induced rapid economic slowdown not only in the U.S. but also internationally.

What Happened: “The Fed has precipitated and exacerbated the risk of a global deflationary bust,” said Wood in a post on X, formerly called Twitter. The central bank's “record-breaking” 22-fold increase in the Fed funds rate will hit China first and spread to the rest of the world, she added.

The fund manager noted that China was exporting deflation, reasoning that when all else remains equal, the 15% depreciation in the yuan relative to the dollar in 2022 should have increased its annual producer price inflation rate by 15% but in reality, it has dropped to 4%.

“In other words, the deflationary vortex emanating from China is approaching 20% (15%+4%), highlighted by the burgeoning defaults in Chinese real estate and trust companies,” she said.

The issues with the Chinese economy remained covered as after the country entered the World Trade Organization in 2001, its real GDP grew at a double-digit rate for about 20 years, Wood said.

“Rapid growth can cover many economic sins, typically excessive debt and associated leverage. Those excesses are surfacing in China now,” she added.

China, the fund manager said, may be looking to stall the yuan depreciation, and in order for that it has to sell U.S. dollars and buy the yuan. This effectively tightens the monetary policy and exacerbates the economy's weakness even as it is easing, she said.

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Why It's Important: Recent data from China has shown a combination of anemic growth and a deflationary trend. Second-quarter GDP rose 6.3% year-over-year in the second quarter, trailing the 7.3% increase estimated by economists.

China's new bank loans fell 89% month-over-month to 345.9 billion yuan ($47.80 billion) in July, data released by the People's Bank of China on Friday showed, according to Reuters. This marked the lowest level since late 2009.

July inflation data released last week showed the annual rates of consumer and producer price inflation were in negative territory.

A trio of data released by the China National Bureau of Statistics on Tuesday was underwhelming as well. Retail sales rose 2.5% year-over-year in July, slower than the 4.5% increase expected by economists. Industrial production rose by 3.7%, trailing the 4.4% consensus estimate. Fixed asset investment also came to light.

The iShares MSCI China ETF MCHI ended Monday’s session down 0.72% at $45.51, according to data from Benzinga Pro.

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