How China is losing the narrative in the global coronavirus recovery
- A new narrative has taken hold in markets, driven in part by the remarkable progress in deploying vaccines in the US, UK and Europe
- Meanwhile, China’s renewed focus on deleveraging has taken the shine off its swift recovery, sowing uncertainty about vulnerable parts of the financial sector
Stories matter. For those who doubt the power of narratives in financial markets, a cursory glance at the recent works of Robert Shiller, a Nobel economics laureate at Yale University, reveals the extent to which markets are driven by popular narratives as opposed to hard data.
The dominant theme last year, along with unprecedented amounts of monetary and fiscal stimulus, was the swift and vigorous recovery of China’s economy. This was underpinned by Beijing’s successful containment of the virus, which allowed China to emerge from lockdown much earlier than Europe and the United States.
The appeal of a leading economy that was “first in, first out” of the shutdown, and whose continued liberalisation of its capital markets provided foreign investors with greater access to its higher-yielding assets, fuelled a fierce rally in Chinese equities and bonds.
The CSI 300 index of Shanghai- and Shenzen-listed stocks surged almost 30 per cent last year, compared with a rise of 16 per cent for the benchmark S&P 500 index and a decline of 6 per cent for the Euro Stoxx 50 gauge of euro zone shares. Overseas investors’ holdings of onshore stocks and bonds rose 62 per cent and 47 per cent respectively, according to Bloomberg data.
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In an age of ‘narrative finance’, pay attention to the stories in 2021, says Richard Harris