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

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

Chinese President Xi JinpingJohannes Eisele/AFP/Getty Images

  • Financial markets have raised red flags recently about China̵[ads1]7;s economy.

  • That is because high expectations for a robust post-Covid rebound have largely failed to materialize.

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

Financial markets have raised red flags recently about China’s economy, but analysts said 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 after the easing of COVID restrictions late last year.

But recent data has pointed to slowing growth in the retail trade as well as falls in housing sales, industrial production and capital investment.

That disappointed investors who were hoping for a bigger post-COVID slowdown, and led Wall Street to cut its growth forecasts for the full year. Concerns about China’s economy have rippled through the markets.

Earlier this month, the yuan fell past a psychologically important level of 7 per dollar for the first time this year. Copper prices, once expected to see significant gains due to high demand from Chinese mills, hit a four-month low in mid-May.

Meanwhile, shares of luxury brands that rely on China’s consumer base have begun to fall amid stagnant activity.

Chinese stock markets were not immune to slowing performance, as the CSI 300 index continued to slide this week. In late April, fading hopes of additional stimulus sent the Shenzhen and Shanghai indexes down by $519 billion in just one week.

The halting performance prompted Rockefeller International’s Ruchir Sharma to call the rebound narrative a “charade.”

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

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

Rising expectations may be due to China’s response to the 2008 financial crisis, when Beijing injected massive stimulus into the economy and achieved double-digit growth, said Duncan Wrigley of Pantheon Macroeconomics.

However, it also led to a huge debt hangover that China has been working to resolve for much of the past decade. So while demand is slowing, limiting debt growth is an equal priority for party leaders, he said.

The country set a more conservative growth target of 5% in March, which both analysts see as achievable. Although the country will avoid full-scale stimulus to meet the target, it has a number of tools to ensure growth continues to tick upwards.

Despite the goal of curbing debt, China could increase the availability of cheap loans to sectors in need, as well as lift the lending ratio of the three main policy banks, while allowing them to invest in local projects, Wrigley said.

If this is not enough, he noted that the People’s Bank of China may ease financial conditions later in the year, such as reducing the reserve requirement ratio for banks.

But youth unemployment remains high, while increased geopolitical risk could deny China access to foreign technology.

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

This may have to do with tight regulation of Chinese business, as President Xi Jinping expands the state’s role in the market, discouraging business owners from investing in their firms, he said.

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

Read the original article on Business Insider

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