MacroscopeBeyond China, economies in the US and Europe are no less vulnerable

Although Chinese assets are performing badly, the risks in the Chinese economy are at least reflected in prices

The US and Europe may seem to be doing much better, but scratch the surface and a number of growth and price control challenges lurk

3-MIN READ3-MIN

Construction workers at work in in Houston, Texas, on July 14. The US labour market has proved resilient to the Fed’s aggressive rate increases, but there’s a price to pay: it makes the so-called last mile of the Fed’s efforts to quash inflation much harder, risking it overdoing it. Photo: AFP

Published: 7:30pm, 7 Sep 2023

Another day, another grim Chinese economic statistic. On Tuesday, the publication of a private-sector survey of China’s services sector revealed that activity last month grew at its slowest pace since the start of this year.

In a sign of how bleak investor sentiment towards the world’s second largest economy has become, Bank of America – one of several investment banks that has been relatively bullish on China this year – is advising its clients that “now is not the time to lose hope”.

The problems facing China are well-publicised: severe distress and a loss of confidence in the all-important housing market, the risk of widespread financial contagion, a much weaker-than-expected recovery, and deep-seated structural challenges.

The bad news, moreover, is in the prices. The MSCI China index – which tracks Chinese equities listed at home and abroad – is down about 50 per cent from its peak in February 2021. According to data from JPMorgan, Chinese shares are the worst-performing major asset this year along with commodities and British stocks.

Indeed, some analysts believe Chinese shares are oversold and will eventually benefit from Beijing’s more forceful measures to stabilise the property market. This is debatable, particularly since other restrictions remain in place. What is not in question, however, is that the risks in China are reflected in the prices of assets, especially equities and corporate bonds.

In Europe and the United States, on the other hand, the bad news is nowhere near priced in. Take the euro zone, where the Euro Stoxx 50 – the benchmark index of the bloc’s equities – is up nearly 12 per cent this year despite a nightmare scenario confronting policymakers. While China has a growth problem, the euro zone has a severe growth problem exacerbated by an acute inflation problem.