By Garfield Reynolds, Bloomberg Markets Live reporter and analyst
China’s economy reached extraordinary peaks before Covid struck and investors still expect big things from the Asian behemoth. That’s a misconception that will leave risk assets vulnerable to pressure well into 2023, given the likelihood that global growth will be weaker than expected.
The country faces a sustained slowdown both as the industrial and property booms have left it weighed down, but also because the demographic picture has shifted markedly against it
This point bears underlining because there are no quick, ready fixes. China’s population has stopped expanding, and the country is both too large, and too instinctively insular for mass immigration to offer a solution.
That skews toward a lower growth profile, save some extraordinary transformations in services and hi-tech. China itself has stated these are key goals for the economy, but there are major hurdles that need to be overcome.
The two most salient are that it faces global competition in this sphere – hence the tensions with Washington over chips – and the potential for the Communist Party’s command-and-control bias to stymie its own goals.
Slower growth and more opaque outcomes are the most likely paths forward. A look at the MSCI China index and its performance relative to the world gauge is very telling. The ratio is sitting right back where it was before China took off in the lead-up to 2008 — it would stay elevated for years as the Asian nation led the way out of the financial crisis with the sort of spend-big, infrastructure-led expansion that’s no longer on the menu.
We can expect the yuan to stay weaker as a result, something that will lessen the potential for the dollar to drop too far from its recent peak, especially if a more lethargic China economy ends up contributing to a stagflationary global environment.
That also makes the case for a gloomier outlook as regards equities in China and beyond, as well as underpinning the potential that global bonds are likely to at least stabilize.
The Covid outlook helps to bring home the dynamics at play for China. Fueled partly by demographic concerns, it has stuck with the Covid Zero policies abandoned by many. And the way investors overreacted to the pronouncements delivered straight after Xi Jinping rejigged his government is a classic illustration of the difficulties.
A barrage of fresh-sounding guidelines have so far failed to make a major difference to actual policy, with investors mistaking the activity of new officials for active reforms. Any reopening will be gradual, especially given the potential flagged by Bloomberg Intelligence for 360 million new infections.
China is a juggernaut indeed, but the market is failing to account for all of the heft and momentum that implies, and the clear signs that it is set on a path radically different from the historic booms of previous eras.