Macroscope | Fed indecision puts US above China as top source of market uncertainty

Concerns about China have ebbed amid measures to shore up the economy and investors turning increasingly bullish on Chinese stocks

Meanwhile, the Fed is flailing as valuations in US equity and bond markets are dangerously stretched and inflation is the highest in decades

Reading Time:3 minutes

Petrol prices are advertised at a filling station in Santa Clarita, California, on January 28. Inflation remains a primary concern for US policymakers and politicians. Photo: AP

Published: 2:30pm, 3 Feb 2022

When it comes to policy surprises, few countries have unsettled investors more than China in the past few years. President Xi Jinping’s “common prosperity” campaign, designed to spread the country’s wealth and purge the economy of capitalist excesses, caught even the most seasoned China-watchers off guard.

Investors and businesses have been left wondering where regulators might strike next. They are unsure whether the government’s pain threshold – the willingness to tolerate slower growth and market volatility in the interest of promoting longer-term stability and reducing inequality – in the all-important property sector is higher than assumed.

These concerns have ebbed somewhat in the past few months. A change in tone on the part of Beijing, underpinned by a series of measures to help shore up the economy, has raised expectations of a policy-induced rally in Chinese assets. Several major financial institutions have turned bullish on Chinese stocks, partly because of attractive valuations.

The threat of more severe financial contagion in the real estate sector continues to be a source of concern for global investors. Yet, even at the height of the sell-off in junk-rated Chinese dollar-denominated debt last November, it never topped the list of major risks in markets, according to the findings of Bank of America’s monthly fund manager survey.

Since the beginning of last year, the surge in inflation and the risk of a disorderly sell-off in bond markets have had a far more detrimental effect on broader sentiment than the mounting stress in China’s corporate debt market.

While the unpredictability of Beijing’s regulatory interventions inflicted severe damage on offshore Chinese stocks, fuelling a heated debate over the investability of the country’s equities, the dramatic increase in policy uncertainty in the United States has diminished the importance of risks in China.

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.css-1m2rp1p{color:#34b8b5;}Macroscope | Fed indecision puts US above China as top source of market uncertainty

Macroscope | Fed indecision puts US above China as top source of market uncertainty