Macroscope | How to fix China’s economy? Investors are unsure and that’s a problem

Investor sentiment around China’s prospects has remained sour despite a significant increase in the pace and scope of policy support for the economy

This discrepancy suggests China’s problems are too complex and multifaceted for global investors to grasp

Reading Time:3 minutes

A woman takes a selfie in Beijing on October 31. Despite some bullish economic indicators in recent months, global investors remain hesitant about China’s prospects and are pulling back on their exposure to the country. Photo: AFP

Published: 5:00pm, 2 Nov 2023

The relationship between the real economy and financial markets is never straightforward, mainly because there are many factors other than growth that influence asset prices. An oft-cited adage on Wall Street is that the economy and the stock market are not the same thing.

Even in relatively transparent economies, where key indicators and policy signals are easier to read, the disconnect between the economy and markets can be stark. In the United States, data published last week showed that the economy grew at a blistering annualised pace of 4.9 per cent last quarter, powered by a resilient labour market and strong corporate earnings. Despite that, the benchmark S&P 500 index has fallen almost 8 per cent since July 31.

In developing countries, where the policymaking process tends to be more opaque and capital markets are not as mature and liquid, measures of investor sentiment are an even less reliable gauge of the state of the economy and where it is heading.

Market perceptions of China’s economy have taken on added significance in the past year because of the unexpectedly sharp deterioration in sentiment since Beijing abandoned the last remnants of its zero-Covid policy. The MSCI China Index, which tracks Chinese stocks listed at home and abroad, soared almost 60 per cent between the end of October 2022 and the end of January, but that dramatic reopening rally abruptly gave way to a protracted decline as confidence in China’s economy evaporated.

While expectations for growth were too high to begin with, the extreme bearishness – particularly among foreign investors – is striking and has been fanned by fears that China is falling into a deflationary trap akin to the one Japan found itself in during the 1990s.

Yet what is particularly troubling is that even a significant increase in the pace and scope of policy support for the economy in the past several months has failed to lift sentiment. Just as worryingly, stronger-than-expected third-quarter gross domestic product data – which caused Citigroup’s China Economic Surprise Index to swing back into positive territory for the first time since June – did little to brighten the mood.

Select Voice

Choose your listening speed

Get through articles 2x faster

1.25x

250 WPM

Slow

Average

Fast

00:0000:00

1.25x

.css-1m2rp1p{color:#34b8b5;}Macroscope | How to fix China’s economy? Investors are unsure and that’s a problem

Macroscope | How to fix China’s economy? Investors are unsure and that’s a problem