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Macroscope | China’s priority is stimulus and stability, not saving falling markets
- While there are no signs of panic selling, a bearish bet on China is the consensus view as Beijing is locked into its ‘dynamic zero-Covid’ approach
- Investors must accept that Beijing is as unwilling to relax its pandemic strategy as it is to loosen monetary and fiscal policy more aggressively
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In the minds of most investors, Chinese policymakers have a credibility problem. In the past few months, Beijing has signalled that it is leaning towards looser monetary and fiscal policies in response to China’s sharp economic slowdown.
The change of tone has become more pronounced and is underpinned by President Xi Jinping’s prioritisation of stability as he prepares for an unprecedented third term. The government has pledged to promote stability in capital markets, reduce the risks facing property developers and bring its overhaul of the tech sector to a close as soon as possible.
In the last week alone, the People’s Bank of China cut the reserve requirement ratio for banks and announced 23 measures, including support for local government infrastructure projects and more funding for smaller firms hit by the Covid-19 pandemic. Yet, despite the shift in policy, investors remain underwhelmed.
What started as disappointment with the government’s failure to ease policy more aggressively, when growth was slowing sharply, has turned into a loss of confidence in China’s economy.
The facts speak for themselves. The CSI 300 index of large Shanghai- and Shenzhen-listed shares has lost almost 18 per cent this year, helping erase all its gains since the World Health Organization labelled Covid-19 a pandemic in early March 2020.
Foreign investors, who poured money into China’s capital markets in 2020 and 2021, are reducing their exposure to the world’s second-largest economy. They sold more than US$7 billion of mainland stocks via exchange links with Hong Kong last month, according to Bloomberg data.
Nicholas Spiro is a partner at Lauressa Advisory, a specialist London-based real estate and macroeconomic advisory firm. He is an expert on advanced and emerging economies and a regular commentator on financial and macro-political developments.
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