As the coronavirus rocks financial markets worldwide, China is not the safe bet investors hope it is
- The Chinese stock market has not fallen as steeply as its peers, the yuan has proved resilient and the domestic bond market has attracted strong inflows
- However, it is too early to say whether China will be hit by a second wave of infections, and the strain on global supply chains does not bode well for the country
In financial markets, Covid-19 has gone from being a non-event in the minds of most investors to the catalyst for a global financial and economic crisis that, over the past two weeks, has looked a lot like the events surrounding the demise of Lehman Brothers in 2008.
Economists have slashed their forecasts for global growth this year. JP Morgan expects the world economy to contract by a shocking 12 per cent this quarter, on a quarter-on-quarter annualised basis, and to continue to shrink, albeit less severely, next quarter, representing one of the sharpest contractions in a century.
There is some evidence to support this view.
First, Chinese stocks, both mainland shares and those listed offshore, have performed markedly better than their Western and emerging market peers over the past month. While the MSCI All-Country World Index, a gauge of developed and developing market stocks, is down 26 per cent since February 19, the CSI 300 Index and the MSCI China Index have fallen 8 per cent and 15 per cent respectively.
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So far, there has been little sign of a fresh outbreak, while China appears to be in the early stages of an economic rebound, according to an analysis of high-frequency data by Boston Consulting Group. However, as JP Morgan rightly noted in a report published last Friday, “China is the test case for further contagion as the domestic population resumes normal activity. The next few weeks will be critical for assessing this risk scenario.”
This is one of the reasons China’s haven status should be treated with caution.
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Even though JP Morgan estimates that China’s economy will contract by a shocking 40 per cent this quarter, investors have more confidence in Beijing’s ability to do what it takes to beat the virus and revive growth.
China looks like a safer bet mainly because the outlook for advanced economies has become so much bleaker. Yet, China is by no means out of the woods.
While China deserves credit for having kept the spread of the virus under control, its role as a haven is exaggerated.
Nicholas Spiro is a partner at Lauressa Advisory
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