How China can avoid ‘Japanification'

- A surge in convertible bond issuance # # --------------------------------------------------------------- The key takeaways today: - China is showing more signs of “Japanification” - Americans aren't saving enough for retirement - The risks of China's domination of critical minerals - Rising interest rates are leading to a surge in convertible bonds - How our interns are using AI - Brainteaser: What percentage of savers manage their own money? Was this newsletter forwarded to you? ([Sign up now.]( --------------------------------------------------------------- Is China's economy facing Japanification? Even as China's growth sputters, the [“Japanification” of the world's second-largest economy]( is far from certain, according to Goldman Sachs Research. It wasn't necessarily deteriorating demographics that caused Japan's malaise in 1990s, but rather the impact of demographic trends and other events on longer-term growth expectations, says Hui Shan, Goldman Sachs Research's chief China economist. “Once the demographic and debt overhang backdrop combined with asset bubble burst and policy missteps triggered a sustained downward shift in longer-term growth expectations, households reduced consumption and businesses cut back on investment,” she says. These factors helped reinforce a negative feedback loop of anemic growth. [China's situation appears even more extreme than Japan's in some respects]( Housing prices are more stretched, at 20 times household income in China versus 11 times in Japan in 1990. At the same time, China's property downturn isn't being accentuated by a stock market collapse, as was the case for Japan when plunging share prices severely damaged its banking system. Even as its overall population declines, China will likely continue to enjoy population growth in its urban centers, due to its still-low urbanization rate. “The key to avoid such a negative feedback loop is to cut off the continued deterioration in longer-term growth expectations,” Shan says. Policymakers will have to manage the outlook for GDP growth as China transitions from property and infrastructure investment to a new economic engine based on upgraded manufacturing and self-reliance. Meanwhile, China can counter pessimism about the growth outlook by emphasizing the importance of economic development, accelerating the restructuring of troubled property developers and local government financing vehicles, and strengthening social safety nets to encourage long-run household consumption. --------------------------------------------------------------- Why most Americans aren't saving enough for retirement An improving economy is helping to bolster retirement savings, but a raft of financial challenges remain. “When we think about the past year, equity values are up, so many individuals are feeling better about their retirement prospects,” says Mike Moran, pension strategist in Goldman Sachs' Asset & Wealth Management business. “The bad news is that many are still not saving enough for retirement,” he notes. Over 40% of retirees are receiving less than 50% of their pre-retirement income in retirement, compared with the recommended 70% target. Part of the reason is what Moran and his team call the “financial vortex” — the competing financial priorities and unexpected expenses that crowd out saving for retirement. Having a plan for retirement can help people feel more confident in their ability to meet their retirement goals, while making them more acutely aware of their financial obligations, says Moran on [Goldman Sachs Exchanges]( where he explains the team's retirement report, [Diving Deeper into the Financial Vortex: A Way Forward](. Meanwhile, the Secure Act 2.0 will make it easier to save for retirement by allowing plan sponsors to embed an emergency savings program in their 401(k) plan, Moran says. “That way as employees are saving for retirement, they could also be building up an emergency savings account so that when they have those unexpected financial obligations, they don't have to stop saving for retirement.” --------------------------------------------------------------- Why China's domination of critical minerals will be tough to crack The green-energy transition, defense systems, and other high-tech applications that power the global economy depend on critical minerals and rare earth elements — and China refines 85-90% of the world's rare earths and a majority of critical minerals like cobalt, lithium, and nickel. China also manufactures 75% of the world's batteries and a majority of electric vehicles. These dominant supply-chain positions are creating geopolitical vulnerabilities for other countries, because China has a record of imposing restrictions on exports, [writes Jared Cohen, president of Global Affairs and co-head of the Office of Applied Innovation](. Cohen and his team detail this landscape and provide an overview of what can be done to build more diversified and resilient global supply chains, including investments by the public and private sectors, new forms of international cooperation, and research and innovation that could reshape one of today's most important geoeconomic competitions. --------------------------------------------------------------- Convertible bond issuance jumps as interest rates climb Issuance of US convertible bonds — debt securities with an option to be converted into stock — has jumped this year, as companies refinance their existing convertible notes and take advantage of the securities to lower borrowing costs, according to Goldman Sachs Global Banking & Markets. US companies have issued more than $40 billion of convertibles across 63 deals, based on data from Dealogic. That's up from $29 billion and 54 transactions in all of 2022. [Convertible issuance surged at the start of the decade due to Covid-related financings, and many of those transactions now require refinancing]( says Michael Voris, Goldman Sachs Global Banking & Markets' global head of convertible bond financing, and Jan Debeuckelaer, head of US convertible bond financing. At the same time, the Federal Reserve has ratcheted up interest rates, prompting executives to look for ways to reduce interest expense. Convertible notes lower a company's cash borrowing costs compared to non-convertible bonds by giving investors exposure to the company's equity in the future. Voris expects issuance to rise in 2024. --------------------------------------------------------------- How Goldman Sachs interns see the world Goldman Sachs released its eighth [annual survey]( of its global summer intern class, with students hailing from more than 500 schools and representing all of the regions in which the firm operates. Key findings from this year's roughly 2,000 respondents include: - 81% believe AI will have a net positive impact on society. 86% say they use AI tools in their personal lives, and they most frequently use them to do research (32%), support their writing (31%), and check code (10%). - 54% of our interns are invested and their top two investments remain the same since 2021, prioritizing stocks (44%) and ETFs (27%), while 46% are not invested at all. - 62% plan to stay in their first job for 2 to 5 years, followed by 5 to 10 years (20%) For more, view the [infographic](. --------------------------------------------------------------- Briefings Brainteaser: Unlocking the golden years? Counterintuitively, there are signs that savers with the least financial literacy are also the least likely to get professional financial advice, according to the [Goldman Sachs Retirement Survey & Insights report](. For this week's Brainteaser: What percentage of respondents in our survey manage their own retirement savings? A) 12% B) 25% C) 47% D) 77% [Check the answer here.]( --------------------------------------------------------------- Goldman Sachs in the news [CNBC]( October 3 [Goldman Sachs expects OPEC+ production cuts to stay through 2024 (3:09)]( --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. Goldman Sachs believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. 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