(Bloomberg) — China seems increasingly left to its own devices in an attempt to rescue its economy and markets from the COVID-19 crisis as the rest of the world withdraws stimulus to combat rising inflation.
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Unlike 2020, when Beijing was able to limit disruptions to its manufacturing hubs and rely on unprecedented global liquidity to prop up investor confidence, this time it has to go it alone. A strict Covid Zero policy has left it trapped in a repeat of lockdowns, while other countries have resorted to reopening their economies.
International funds are selling off Chinese assets, while efforts to encourage domestic money in capital markets are failing as prolonged restrictions and a slowing property market erode wealth. The People’s Bank of China, which pledged once again to support the economy on Tuesday, appears wary of over-stimulating, preferring to limit financial risk, rein in debt and keep inflation in check.
“The PBOC’s fight reflects the broader situation facing Chinese policymakers amid a challenging external environment: how to balance the conflicting policy goals of zero covid and a 5.5% economic growth target. said Seema Shah, chief strategist at Principal Global Investors. in London. “This is not the time to overweight given the uncertainty ahead.”
Investor recognition of the difficulties facing the Communist Party is etched in the performance of China’s lagging assets. Down 23% this year, the benchmark CSI 300 index remains mired in a bear market. The once-resilient yuan has plunged to near its weakest level since November 2020.
When Covid first appeared in Wuhan, China’s ability to postpone a widespread outbreak meant that it benefited from historic global stimulus without having to provide much on its own. Foreign investors clamored for stocks and bonds from the mainland, as one of the few economies that could absorb that kind of money.
Rising demand for Chinese-made goods generated a record trade surplus last year that accounted for about a fifth of the country’s economic expansion, more than offsetting weak domestic consumption. So much capital flowed into China that the yuan was one of the best performing currencies in the first two years of the pandemic.
Such success gave Chinese officials the confidence to put their house in order. As the rest of the world engaged in speculative frenzies, from meme stocks to cryptocurrencies, Beijing took steps to deflate bubbles in its property and credit markets. It increased regulation for entire industries such as education, gaming and Big Tech, even though the moves sent shares falling in China and Hong Kong.
But the window for following many of President Xi Jinping’s ideologies seemed to have closed in January with the arrival of the more transmittable omicron variant. That increased pressure on financial markets and pushed China’s central bank to cut interest rates for the first time in nearly two years.
Since then, China has taken more decisive steps to stimulate growth and prop up markets, but with little visible success. This month alone, the authorities released liquidity in the banking system, pressured the country’s social security fund, banks and insurers to boost capital investment and increased the availability of foreign currency in the country in an attempt to prevent the yuan weakens further.
The PBOC said on Tuesday that it will promote the healthy and stable development of markets and provide a sound monetary and financial environment. He reiterated that liquidity will remain reasonably ample.
Given the fluctuations in Chinese stocks and the yuan on Tuesday, skepticism prevails. Any easing of lending conditions will have limited impact at a time when businesses and consumers are unwilling to take on more debt, it is thought.
Inflows into mainland markets remain subdued. The CSI 300 and the yuan are weaker than they were when policymakers became even more vocal with promises of support in mid-March, when the Federal Reserve first raised interest rates.
Of course, there may be other lifelines for China’s financial markets. The approval of foreign-made vaccines on the mainland or the distribution of treatments would suggest that Beijing plans to exit its Covid-Zero strategy. The Federal Reserve could become less aggressive than anticipated if the economic downturn becomes a real possibility. Beijing could even start talking about the possibility of reopening its borders.
In its latest commitment, China said it would step up infrastructure construction after a meeting on Tuesday chaired by Xi Jinping.
But it’s hard to overstate the global significance of what’s happening in China. Beyond the ramifications of a slowdown in the world’s second-largest economy, the massive lockdowns are worsening a supply chain crisis now entering its third year. The disruption adds to inflation problems, concerns about corporate profits, and stagflation concerns for the US and European economies.
For now at least, Xi’s commitment to Covid Zero will overshadow everything else, including China’s relationship with Russia after the Ukraine invasion. The focus is on a Politburo meeting expected to take place this week, where the discussion is likely to be dominated by the economy.
“The question mark is how are they going to handle general economic policy when it’s in conflict with zero Covid, that’s very complicated,” said Zhikai Chen, head of Asian equities at BNP Paribas Asset Management. “We only need a few quarters of no more of this kind of ‘noise’.”
(Adds promise of construction expenses to paragraph 15).
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