Macro Insights Weekly: A China “put”?

Commentary: A China “put”?

China’s markets underwent historic corrections during the first ten weeks of 2022. The equity market experienced substantial capital outflow (nearly USD7bn through mid-March) and domestic selling, resulting in double-digit percentage decline in the CSI 300 index. Spreads widened for private sector borrowers during the same period while the RMB sold off in early March. Uncertainty around the conflict in Ukraine was the final straw, but there were numerous headwinds in place already. These included pandemic-induced economic slowdown, sustained regulatory scrutiny, property market headwinds, muted policy support, and continued push-back from the US.

Weighing over all this was the view that the authorities were ok with the correction to continue, with little policy intervention likely. But all that changed on March 16, when in a series of statements, the authorities gave a strong signal that growth and market stability remained important objectives. This support began with a statement from the Financial Stability and Development Committee (FSDC), suggesting that regulatory interventions were likely to have run their course this year. The FSDC also stressed the importance of keeping regulation in line with supporting economic growth, and suggested that foreign listing of Chinese companies was not unwelcome.

The FSDC statement was complemented by the People Bank of China (PBoC), State Administration of Foreign Exchange (SAFE), China Securities Regulatory Commission (CSRC), and China Banking and Insurance Regulatory Commission (CBIRC). Such a concerted move, along with the announcement from the Ministry of Finance that it is suspending its property tax trial, turned out to a pivotal moment. The market’s mood switched dramatically, causing sharp asset price spikes.

Last week’s official pronounced may mark a bottom for the markets, but the economic challenges are by no means fading for China. The authorities may be successful in threading the needle of carrying out zero-Covid policy while keeping factories largely open, but vulnerability to the pandemic remains substantial. Global spike in food and energy prices, geopolitical tension over Russia, rising US interest rates, along with stretched and highly leveraged private sector balance sheets will continue to pose headwinds to the outlook, in our view. Growing by more than 5% without additional policy support will be extremely difficult, in our assessment. By way of illustrating one challenge, note that China imported USD423bn worth of energy products last year, of which USD253 were crude oil. An average price jump from USD71 per barrel last year to USD110 this year will cut China’s nominal GDP by 0.8%. We think that the authorities are bound to ease fiscal and monetary policy substantially this year to offset some of the prevailing headwinds.

We also worry that much-needed structural reforms, be it addressing the leverage in the property sector or shoring up additional revenue for the government, as well as the government’s ambitious climate change agenda, will be slowed by the imperative to keep near-term economic prospects bright. We appreciate the massive policy challenges and complex trade-offs in this context, and would hope for medium-term reforms to remain under focus.

Taimur Baig

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