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Fed rate cut remains the best predictor of China cutting a deal with the US (no pun intended).

I don’t know what other news mega heads think, but I am starting to believe that there is a lot of truths in my hypothesis.

Let’s recap. Back in January when Biden wanted to ban TikTok, I wrote this:

Just last month, Fed’s Powell released more mixed signals, citing uncertainty in inflation and said that the Fed may only cut once or twice in 2025. Of course, interest rate has very little to do with inflation in the US, but it should be seen as an imperialist tool that controls foreign economies.

So Trump has a lot of leverage here: if he can get the Fed to cut more rates this year, then the PBOC can also cut their rates, this will then allow the local governments to borrow at an even lower interest to pay back their outstanding debt, and thus bringing huge relief to their current budgetary situations. Here, you can see how the Fed’s interest rate directly impacts China’s local government finances.

This is just one weapon the US can use. Tariffs, sanctions, interest rates are all “threats” that can be negotiated down if China gives in to what the US wants. What we will have to wait and see is how Trump and Xi deal with these issues in their ensuing negotiations.

On September 15th, China sold TikTok. The following day, the Federal Reserve cut its key rate for the first time of the year.

Last month, when China imposed rare earth export restrictions, I wrote this:

The US has no choice but to negotiate. China showed just how difficult it is for Trump to decouple from itself. The is a lesson that Trump will continue to have to learn until he concedes the point.

However, China also cannot keep going with this because it cannot afford to see inflation going up in the US. This is because China has huge local government debt that desperately needs the Fed to lower its interests, way more than what was done last month.

On October 29th, the Federal Reserve cut its key rate for the second time of the year. Simultaneously, Trump and Xi agreed on a deal after nearly an entire year and at least five rounds of negotiations.

That’s two Fed rate cuts for two biggest US-China deals of the year, happening within 24 hours of one another.

It is becoming clear that China’s maneuvers are centered on lessening the burden on the local government debt level, which must have been taking a heavier toll on the economy than expected.

I’m actually surprised nobody picked up on this, that the Fed rate is an imperialist weapon. Too many people (both mainstream and alt media) focus on the trade war aspect between US and China and fail to see that this is actually a financial war in disguise, and the primary target isn’t even China, but Europe and the rest of the Global South exporter countries.

Remember that when Trump first launched the global tariffs back in April, the narrative of the pro-BRICS alt media circle was all about the US is shooting itself on the foot and the rest of the world will just trade with one another without the US.

Well, the exact opposite has happened - that Europe doubled down on its anti-China policy while many Asian exporter countries are scrambling to sign new trade deals with Trump, including South Korea, Vietnam, Thailand, Malaysia and Cambodia in the last few days.

I had warned back then that this whole decoupling from the US cannot happen without China transitioning into a domestic consumption economy. BRICS has failed to offer any alternative because they all want to run trade surpluses against each other, which is mathematically impossible. As a result, the US consumer market still dictates what happens.

Thankfully, it seems that the Chinese leadership is finally admitting that consumption growth is going to be the priority of the next Five-Year Plan Reuters:

The five-year plan recommendations reaffirmed last week's official remarks that China will increase the proportion of government investment for people's livelihoods and raise the percentage of household consumption of GDP "significantly" over the next five years.

"The allocation of resources will shift more towards consumption, as large-scale expansion of traditional industries and infrastructure has reached its limit," said a policy adviser who spoke on condition of anonymity. "Future investment will focus on high-tech industries and new infrastructure."

China may aim to increase the household consumption rate by about 5 percentage points over the next five years, but policy advisers say it is unclear whether the government will set a specific target in the upcoming five-year plan.

Attempts to boost consumption and related reforms over the past decade have been slow to take root in the real economy. Consumer confidence has remained low because of inadequate social welfare, slowing income growth and a property crisis that has eroded household wealth. The services sector has also taken time to develop.

Whether this can be achieved without the central government running up the deficit, I have my doubts. It will be very difficult to have a meaningful shift towards consumption without resolving the massive wealth inequality problem in the country, which will require the government to run a very high deficit i.e. spends way more than it taxes back. But at least it is going in the right direction.