The View

Why China’s economic policies are less of a concern than those of the Fed and European Central Bank

Nicholas Spiro says investors’ belief that Beijing is set to further stimulate the economy is not entirely misplaced. Meanwhile, the ECB has been slow to react to signs of trouble in Europe, leaving big questions over its tightening policy

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European Central Bank president Mario Draghi attends a press conference in Frankfurt on January 24. The ECB has announced that it is keeping key interest rates unchanged at least through the summer. Photo: Xinhua

Nicholas Spiro is a partner at Lauressa Advisory, a specialist London-based real estate and macroeconomic advisory firm.

Published: 1:30pm, 28 Jan 2019Updated: 10:32pm, 28 Jan 2019

Despite the gloom surrounding China’s economy – which, according to official data, grew in the last quarter of last year at its weakest pace since 2009 – sentiment in financial markets has improved noticeably since the start of this year. Having plummeted 25 per cent in 2018, the Chinese large-cap CSI 300 index is up 5.8 per cent, while the yuan has risen to its strongest level against the US dollar in six months.

Investors’ willingness to disregard poor economic data stems partly from external factors, notably recent statements from the Federal Reserve indicating that it would take a patient approach to tightening monetary policy, given the slowdown in the global economy. Yet it is the domestic driver of the rally – hopes that more stimulus measures will boost Chinese growth – that warrants closer attention.

As I have argued, many investors believe that the “bad news is good news” mantra – the view that weak economic data makes stronger stimulus measures more likely – now applies to China. Since Beijing began to ease off its deleveraging campaign last summer, its drip-feed approach to monetary and fiscal loosening has somehow convinced many fund managers that the pace of easing will quicken as the imperative of halting the slowdown becomes more urgent.

This is a questionable assumption. China’s policy regime is bedevilled by contradictory objectives. Beijing’s determination to eschew the heavy-handed stimulus measures of the past is matched only by its fear of a sharper downturn, increasing the risk China’s economy ends up with the worst of both worlds: an excessive let-up in deleveraging and not enough growth. There is no solid basis for a sustained stimulus-led rally in stock markets, given the acute tensions between the government’s debt-cutting efforts and the pressing need to stimulate demand.

However, China is by no means alone among the world’s largest economies in facing policy uncertainty.