⚠️ China’s danger zone

What’s going on here?

Data out on Monday showed that China’s economy could be set to get darker, with deflation looming overhead.

What does this mean?

Western economies are currently beating inflation off with a stick, but China's got a completely different problem: potential deflation. See, June’s consumer prices didn't budge at all compared to last year – and they’ve actually dropped by 0.2% since May. And the picture only gets bleaker when you look at producer prices: they just fell 5.4%, in the biggest drop since 2015. And while those cut-price deals may sound like any shopper’s dream, it’s a sign that demand for consumer and manufactured goods is super weak across the board. That doesn't bode well for China's economy, spurring more speculation that the government will need to jump in with some stimulus to try and shore it up.

Why should I care?

For markets: On the ledge.

Deflation is an economist's worst nightmare, and with good reason. See, when shoppers notice that prices keep trending downward, they hold off on big purchases – reasoning that the price tag will be lower later on. And when a ton of people do that, then demand falls, prices slip further, and the issue – and the economy – can spiral. Given that danger, it wouldn’t be a big surprise if the Chinese government stepped in: back in 2009, the last time China faced a long spell of consumer price deflation, it launched a stimulus program worth over $500 billion.

The bigger picture: Tracking the Thucydides trap.

Hopes of extra stimulus helped to buoy Chinese markets on Monday, but that potential cash injection wasn’t the only factor at play: there was also the visit that the US Treasury Secretary paid to China in recent days. That headline-grabbing trip boosted hopes that tensions between the two countries might be set to thaw – especially given the Treasury Secretary’s fair words about both countries having enough space to thrive and trade with each other.

What’s going on here?

TSMC, the world’s biggest contract chipmaker, chugged its way to success on the AI gravy train.

What does this mean?

The global chip market might be going through a rough patch, but TSMC has found a silver lining in the form of artificial intelligence. You see, the firm is the go-to manufacturer for Nvidia’s “AI accelerator” chips – the crème de la crème hardware used to train computer models that power high-flown projects like ChatGPT. That booming industry has triggered a surge in demand for AI chips, helping TSMC offset some of the slowdown in sectors like the smartphone market. So while last quarter’s revenue took a 10% dip from the same time last year, it still managed to outdo estimates, according to Bloomberg’s calculations.

Why should I care?

For markets: Stocking up.

TSMC has already predicted a dip in its revenue this year, but investors aren’t spooked: in fact, they’ve sent its stock up by over 25%. See, they’re playing the long game – and they’ve taken TSMC’s advanced manufacturing prowess and its plans to boost its advanced chip packaging capacity as signs that it’s a “key enabler of AI”. Goldman Sachs seems to agree, setting a price target 24% higher than current levels. And it’s not alone: Bloomberg data shows that 97% of analysts covering the stock have given it a buy recommendation rating.

The bigger picture: Mr. Worldwide.

TSMC’s based in disputed territory – Taiwan – so even though the firm is Asia’s most valuable listed company, its investors aren’t necessarily sleeping soundly. Still, TSMC’s taking some steps to address those worries: sure, it’s keeping its most advanced manufacturing at home, but in the past couple of years it’s been expanding production everywhere from the US to Japan and Europe. And that kind of global footprint just might let TSMC cement its dominance in the chip sector.