Financial markets have recently set up red flags for the Chinese economy.
That’s because high hopes for a robust economic recovery after the COVID-19 pandemic were all but disproved.
But analysts say Wall Street is too short-sighted to think long-term.
Financial markets have recently raised red flags for the Chinese economy, 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 coronavirus restrictions at the end of last year.
However, more recent data point to slower growth in retail sales, as well as declines in home sales, industrial production and fixed asset investment.
That disappoints investors who were hoping for an even stronger post-coronavirus recovery, prompting Wall Street to cut its full-year growth outlook. Concerns about the Chinese economy are spilling over into the market.
Earlier this month, the yuan crossed the psychologically important level of 7 yuan to the dollar for the first time this year. Copper prices, once expected to surge on strong demand from Chinese factories, hit a four-month low in mid-May.
Meanwhile, the stocks of luxury brands that rely on China’s consumer base are starting to fall as activity slows.
The Chinese stock market was also not immune to weaker performance this week as the CSI 300 index continued to fall. At the end of April, the Shenzhen and Shanghai indexes fell $519 billion in a week alone as hopes for more stimulus faded.
In the wake of the declining performance, Rockefeller International’s Rutil Sharma called the rebound story a “farce.”
But one analyst says the growing pessimism about China’s economy may stem from unrealistically high expectations and Wall Street’s tendency to prioritize short-term indicators over long-term prospects. It is said that there is
Nicholas Rardy of the Peterson Institute for International Economics told Insider: “In a way, I feel sorry for these people because every time China releases some data they have to say something about it.” said.
Duncan Wrigley of Pantheon Macroeconomics said the rise in expectations may be due to China’s response to the 2008 financial crisis, when the government injected massive stimulus into the economy and achieved double-digit growth. said.
But it has also led to a huge debt remnant that China has been working to settle for much of the past decade. So while demand is slowing, curbing debt growth is an equally high priority by party leaders, he said.
The country set a more conservative 5% growth target in March, which both analysts believe is achievable. The country intends to avoid any serious stimulus to reach its target, but there are many ways to ensure growth continues upwards.
Wrigley said China will increase the availability of cheap loans to sectors it needs, even as it seeks to limit its debt, and raise credit lines for three major policy banks, while investing in local projects. said he could accept
If that isn’t enough, the People’s Bank of China could ease financial conditions later this year, including by lowering bank reserve requirements, he said.
However, youth unemployment remains high and rising geopolitical risks could make China inaccessible to foreign technology.
And private investment, China’s main source of growth, has nearly collapsed in the past 15 months, Rardy said.
This may have something to do with the tight regulation of Chinese business as President Xi Jinping has expanded the role of the state in the market and discouraged business owners from investing in their companies, he said. .
“This is one of the big downsides that worries me more than everything else we’ve been talking about. Why is private investment so weak?” he said. .
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