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Markets unfazed by China's challenges

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2023-08-29

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Property prices are tumbling, major developers are in dire straits, and a significant financial conglomerate has missed interest payments, invoking memories of the 2008 financial crisis. While alarm bells are ringing about a potential systemic crisis in China, market signals are painting a contrasting picture.

Historically, a crisis brewing in the financial sector is often forewarned by plummeting bank stock prices, offering a harbinger of economic trouble. However, Chinese bank shares, measured by the FTSE China A-Share bank index, have surged 2.4% in the last year, even outperforming US banks by 12.6% in dollar terms. This unprecedented performance undermines the notion of an imminent emerging-market systemic financial crisis.

Another unusual trend is the remarkable outperformance of Chinese government bonds compared to US Treasuries, typically a safe haven investment. The Covid-19 pandemic triggered divergent policy choices: China opted for extended lockdowns, while the US pursued massive fiscal stimulus and central bank interventions. As a result, since January 1, 2020, long-dated Chinese government bonds have returned 17.1%, while long-dated US Treasuries have suffered negative returns of 13.4%.

The equity markets in China, though disappointing this year, have yet to breach their October 2022 lows. While skeptics might attribute these trends to potential Beijing intervention, a broader view paints a more nuanced picture. Commodities like iron ore, closely tied to China, have surged 50% from their October 2022 lows, defying the prevailing negativity. Western companies sensitive to the Chinese market, including luxury goods producers, have seen share prices rise, indicating underlying resilience.

Despite challenges, bright spots shine in China's economy. Macau's tourist arrivals have rebounded, domestic tourism is gaining momentum, and car sales continue to climb. Alibaba's robust sales growth in Q2 further underscores a stable economic foundation.

Acknowledging China's genuine economic challenges and slowing growth, the stark difference between market behavior and systemic crisis fears cannot be ignored. While China may face hurdles, the market's current state suggests a resilience that defies the notion of an impending crisis.

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