Macroscope | Never mind China’s economy. US dysfunction is the bigger threat to global stability

As the final quarter of 2023 gets under way, there is little doubt about which major economy was the biggest underperformer this year. China has been the great disappointment, partly because expectations were too high when it emerged from three years of self-imposed isolation but also because of the severity of the crisis in the all-important property sector.

Despite tentative signs in recent weeks that the economy is bottoming out, investor sentiment remains bleak. Last month, global investors sold US$5.1 billion of mainland stocks via trading links with Hong Kong following a record US$12 billion in outflows in August, according to Bloomberg data.

The results of Bank of America’s latest global fund manager survey, published on September 12, showed that expectations about China’s growth plunged to their lowest level since citywide lockdowns were in place last year. Moreover, China’s property sector was viewed as the most likely source for a “systemic credit event”.

The United States, by contrast, was this year’s biggest outperformer. At the start of 2023, investors were convinced the US was heading for recession because of the Federal Reserve’s aggressive monetary tightening campaign. They also feared inflation would prove harder to quell because of a persistently strong labour market.

Both of these concerns ebbed when prices began falling more steeply in June and the labour market slowed without causing a sharp increase in unemployment. In the July Bank of America fund manager survey, 72 per cent of respondents believed the global economy would either experience a “soft landing” – when monetary tightening is sufficiently restrictive to tame inflation without inducing a recession – or no landing at all.