September 24, 2023

Markets are sounding the alarm over China’s economy, but analysts say Wall Street is missing the big picture

President Xi Jinping of China

Chinese President Xi JinpingJohannes Eisele/AFP/Getty Images

  • The financial markets have been raising red flags about the Chinese economy lately.

  • That’s because high hopes for a robust post-Covid recovery have largely failed to materialize.

  • But analysts said Wall Street is too short-sighted and not long-term.

Financial markets have been raising red flags about China’s economy lately, but analysts say Wall Street is missing the big picture.

Growth in the world’s second-largest economy accelerated to 4.5% in the first quarter from 2.9% in the fourth quarter following the easing of COVID restrictions late last year.

But more recent data point to slowing growth in retail sales and declines in home sales, industrial production and fixed investment.

That disappointed investors hoping for a bigger post-COVID recovery and led Wall Street to cut its full-year growth estimates. Concerns about the Chinese economy seeped through the markets.

Earlier this month, the yuan fell past a psychologically significant level of 7 per dollar for the first time this year. The price of copper, once expected to rise sharply on strong demand from Chinese factories, reached a four-month low in mid-May.

Meanwhile, shares of luxury brands that rely on the Chinese consumer base have begun to fall on stagnant activity.

Chinese stock markets were not immune to slowing performance as the CSI 300 index continued to fall this week. At the end of April, waning hopes of additional stimulus caused Shenzhen and Shanghai indices alone to fall $519 billion in one week.

The slowing performance prompted Ruchir Sharma of Rockefeller International to call the rebound story a “charade”.

But according to one analyst, the growing pessimism surrounding the Chinese economy may stem more from unrealistically high expectations and Wall Street’s tendency to prioritize immediate statistics over long-term prospects.

“I somehow feel sorry for these people because every time the Chinese release data, they have to say something about it,” Nicholas Lardy of the Peterson Institute for International Economics told Insider.

Higher expectations may be due to China’s response to the 2008 financial crisis, when Beijing delivered a huge boost to the economy and posted double-digit growth, said Duncan Wrigley of Pantheon Macroeconomics.

However, it also led to a massive debt hangover that China has been working through for most of the past decade. So while demand slows, limiting debt growth is equally a priority for party leaders, he said.

The country set a more conservative growth target of 5% in March, which both analysts see as achievable. While the country will avoid a large-scale stimulus to reach the target, it has a number of tools to keep growth ticking upwards.

Despite its push to limit debt, China could increase the availability of cheap loans to sectors in need, as well as increase the lending quota for the three major policy banks while allowing them to invest in local projects, Wrigley said.

As if this were not enough, he noted that the People’s Bank of China could ease financial conditions later in the year, such as cutting the required reserve ratio for banks.

But youth unemployment remains high, while heightened geopolitical risks could deny China’s access to foreign technology.

And private investment, a major source of growth in China, has nearly collapsed over the past 15 months, Lardy said.

This may be related to China’s tight regulation of business as President Xi Jinping expands the state’s role in the market and discourages entrepreneurs from investing in their businesses, he said.

“That’s the one big negative factor that worries me more than anything else we’ve talked about. Why is private investment so weak?” he said.

Read the original article on Business Insider

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