News of the week summary - 19/10/2025

China struggles with deflation 

China’s economy remains caught in a deflationary trap, with both consumer and producer prices continuing to fall, a troubling sign of persistent weakness in domestic demand and industrial activity. Official data for September showed the consumer price index (CPI) down 0.3% year-on-year, while the producer price index (PPI), which reflects prices received by manufacturers for their goods, declined 2.3%, marking the third consecutive year of negative readings for factory-gate prices.

Deflation refers to a general decline in prices, which may seem beneficial for consumers at first glance, but in practice signals sluggish demand. When people expect prices to fall further, they tend to delay spending, which in turn depresses business revenues, investment, and employment. China’s persistent deflationary pressures thus point to structural weakness in consumption, particularly as households remain cautious following years of economic uncertainty.

Despite a rebound in travel during the Golden Week holiday in early October, consumer behavior reveals frugality: tourists opted for cheaper options, and spending on big-ticket items such as home appliances remains subdued. The government has tried to stimulate consumption through trade-in programs and subsidies, but such measures have yet to reverse the impact of a four-year property downturn, which has eroded household wealth and confidence.

On the industrial side, factory activity has now contracted for six consecutive months, the longest such streak in six years. This reflects not only weak domestic orders but also mounting trade frictions with the United States. The latest escalation, with Beijing tightening controls on rare-earth exports and Washington threatening 100% tariffs on Chinese goods, has deepened uncertainty for manufacturers.

The continued decline in producer prices also underscores the problem of overcapacity, a situation where factories produce more goods than the market can absorb, pushing prices lower and squeezing profit margins. President Xi Jinping has made efforts to combat this form of destructive competition, where firms compete intensely without creating real productivity gains.

Interestingly, core inflation, which excludes volatile food and energy prices, rose by 1%, suggesting that certain segments of the economy remain resilient. Yet this modest increase does little to offset the broader picture of deflationary pressure across both consumers and producers.

Powell opens door to another rate cut as labor market weakens

Federal Reserve Chair Jay Powell has signaled growing concern over the health of the U.S. labor market, suggesting the central bank may soon deliver another interest rate cut to cushion the economy. Speaking on Thursday, Powell said “downside risks to employment have risen,” a clear indication that the Fed now sees enough evidence of slowing job growth to justify further monetary easing.

Recent data points to a cooling jobs market. Private payroll data from ADP showed a net loss of 32,000 jobs in September, while both households and businesses report that finding jobs is becoming increasingly difficult. According to Powell, “lay-offs and hiring remain low,” but perceptions of job availability have declined steadily, suggesting momentum in the labor market is fading.

This shift marks a dovish turn in Powell’s stance (in central banking, a “dovish” approach means prioritizing growth and employment over fighting inflation, typically through lower interest rates). The Fed had already cut rates last month for the first time this year, bringing the target range to 4–4.25%, and markets now expect another quarter-point cut at the next Federal Open Market Committee (FOMC) meeting on October 28–29.

The decision comes amid a delicate balancing act. On one hand, the U.S. economy faces headwinds from trade tensions and slowing global demand, both of which threaten hiring and investment. On the other, the Fed must guard against reigniting inflation. Yet Powell appeared unconcerned about inflationary pressure, noting that price increases linked to imports have not spread more broadly and that long-term inflation expectations remain anchored at 2%, the Fed’s official target.

Powell also hinted that the central bank might soon end its “quantitative tightening” program, the process by which the Fed reduces its balance sheet by letting previously purchased bonds mature without replacement. This would represent another step toward looser financial conditions. The Fed’s balance sheet had ballooned during the quantitative easing (QE) era that followed the 2008 financial crisis, when it bought trillions in U.S. Treasuries and mortgage-backed securities to stabilize markets and lower long-term interest rates. 

IMF warns of hidden risks in private credit exposure

The International Monetary Fund (IMF) has warned that growing links between traditional banks and the expanding world of non-bank financial institutions, such as hedge funds, private equity firms, and private credit funds, pose a mounting threat to global financial stability. In its latest Global Financial Stability Report, the Fund urged regulators to strengthen oversight of these sectors, warning that their rapid growth could magnify market downturns and transmit stress to the broader banking system.

According to IMF estimates, banks in the United States and Europe now hold about $4.5 trillion in exposure to non-bank financial players. That figure represents roughly 9% of their total loan books, a significant increase in recent years. This exposure has deepened as lenders seek higher returns by financing private credit funds, which often promise better profits than conventional corporate loans because they are backed by specific collateral and face lighter capital requirements.

While these arrangements can boost returns during stable periods, they also introduce hidden leverage and opacity into the financial system. Several large U.S. and European banks now have exposures to non-banks that exceed the value of their Tier 1 capital, the core equity cushion meant to absorb losses during crises. According to the IMF, institutions with such exposures account for more than 40% of total banking assets, and some have positions more than five times their capital base, leaving them vulnerable if markets turn.

The warning follows the recent collapses of First Brands Group and Tricolor Holdings, two U.S. companies that relied heavily on asset-based lending (loans secured by collateral such as inventory or receivables). Their failures have raised fears that similar vulnerabilities may exist across the fast-growing private credit market, where lending has surged outside the traditional banking system.

IMF officials, including Tobias Adrian, head of the Fund’s monetary and capital markets division, noted that both leverage (the use of borrowed money to amplify returns) and interconnectedness between banks and non-banks have risen sharply. This interconnected web can make financial shocks more contagious, especially when market liquidity dries up. Compounding the risk, regulators often lack full visibility into the assets, liquidity, and leverage of many non-bank entities, making it difficult to assess systemic vulnerabilities.

Even Jamie Dimon, CEO of JPMorgan Chase, whose bank took a $170 million loss from Tricolor’s collapse, acknowledged the problem, warning that “when you see one cockroach, there are probably more.” His metaphor captured a growing unease: that these failures might not be isolated incidents but early signs of a broader wave of distress among overleveraged borrowers.

Another emerging concern is the rise of retail participation in private markets. As private equity and credit funds increasingly open their doors to individual investors, there is a risk that in a downturn, mass withdrawals could trigger forced asset sales, worsening volatility. “If we were to enter a more pronounced downturn, there would be more redemption pressures in these retail products,” Adrian warned.

Hedge funds have pushed back against the idea of tighter scrutiny, arguing that their leverage levels are lower than those of banks and that they do not rely on taxpayer-backed guarantees. However, the IMF’s message is clear: the calm in financial markets may be deceptive. With asset valuations buoyed by optimism, particularly around artificial intelligence, the Fund cautions that rising exposures in the shadows of the financial system could become a key fault line in the next downturn.

China’s exports rebound despite rising trade tensions 

China’s export sector showed unexpected strength in September, offering a boost to Beijing as trade tensions with Washington intensified ahead of a planned meeting between President Xi Jinping and President Donald Trump later this month.

Exports rose 8.3% year on year in U.S. dollar terms, well above analysts’ expectations of 6%, and nearly double the pace recorded in August. Imports also surprised on the upside, rising 7.4%, compared with forecasts of 1.5%. The figures suggest that, despite global uncertainty and ongoing trade frictions, China’s manufacturing and logistics base remains resilient.

Economists at Goldman Sachs noted that part of the increase may reflect seasonal factors, such as stronger demand ahead of the holiday period. Nonetheless, the data provide reassurance for Chinese policymakers at a time when trade negotiations remain uncertain.

Despite the overall improvement in trade performance, China’s exports to the United States continued to fall sharply, dropping 27% year on year in September after a 33% decline in August, reflecting the ongoing impact of tariffs. By contrast, exports to the European Union rose 14.2%, while shipments to Southeast Asia increased 15.6%. Exports of rare earths, central to recent disputes, fell 31% month on month, suggesting the government’s tighter controls are already being felt in global supply chains.