Macroscope | Why markets should not get carried away by China’s reopening

As the World Economic Forum’s annual jamboree returns to Davos during the winter for the first time in three years, there is plenty for the global elite to fret about. Whether it is Russia’s invasion of Ukraine, the fallout from the dramatic rise in interest rates, concerns about a global recession or the risk of further geopolitical shocks, there is no shortage of threats and challenges.

Yet, as delegates discuss the gloomy outlook, the mood in financial markets has improved markedly in the past several weeks. Many investors in both advanced economies and emerging markets are now bullish.

Stocks in the euro zone – which were at the sharp end of the commodity shock caused by the war in Ukraine – have had their best start to the year on record. Emerging-market governments, meanwhile, raised more than US$40 billion in the first half of January while investors are piling into junk-rated US debt.

Tellingly, the world’s best-performing bond market is the one that was widely viewed as uninvestable only a few months ago. Chinese US dollar-denominated junk-rated debt – which is issued almost exclusively by property developers – surged 6.5 per cent in the first two weeks of January, taking its gains over the past three months to 32 per cent, according to Bloomberg data.

While the sharp improvement in sentiment comes from several factors, the full reopening of China’s economy has come like a bolt from the blue. Although there is a heated debate over the impact of the dismantling of the zero-Covid policy, fears that a rebounding China will fuel inflationary forces hold less sway among investors than expectations that it will provide a fillip to a global economy at risk of falling into recession.