Workers leave a construction site for residential buildings by Chinese developer Country Garden in Tianjin on August 18. The struggles of the property sector have weighed on the country’s economy, but China’s unique blend of openness and state control makes it unlikely to have a “Lehman moment” that rocks global markets. Photo: Reuters
Opinion
Macroscope
by Nicholas Spiro
Macroscope
by Nicholas Spiro
Why China’s woes matter less to Wall Street than US labour market and interest rates
Negligible pressure from global markets – which often forces the hand of policymakers – suggests China’s problems are not a big worry on Wall Street
The real estate sector in the United States and Europe is seen as a more likely source for a systemic credit event than Chinese property
In financial markets, the narrative around China is unrelentingly bleak. While sentiment towards the world’s second-largest economy had been deteriorating steadily since the reopening rally fizzled out in February, the mood has darkened considerably in the past month.
Concerns about financial contagion from the liquidity crunch in the property sector have focused attention on links between property developers, local governments and the vast shadow banking industry. These fears are exacerbated by worries that China is falling into a deflationary trap akin to the one Japan found itself in during the 1990s.
In a report published on August 20, Morgan Stanley – which has been relatively bullish on China this year – said “until we get a significant easing in fiscal policy, the economy is likely to lose momentum. This will keep the risk of China entering a debt-deflation loop alive.”
There are also signs China’s problems are starting to weigh on global asset prices, particularly in developing economies. According to data from Bloomberg, emerging market stocks are on track for their worst August since 2015, when the surprise devaluation of the yuan sent shock waves through global markets.
Still, while the acute challenges faced by Beijing in reviving growth while maintaining financial stability are plain to see, the implications for global markets should be treated with caution, particularly when many other factors are influencing sentiment.
03:12
A look into China’s real estate market: unpaid workers and silent construction sites
A look into China’s real estate market: unpaid workers and silent construction sites
The big question when it comes to China is the policy response. Much of the investment bank research and commentary suggests the problem is the absence of large-scale stimulus, especially measures to boost consumption. There is a supposition, moreover, that such support is the key to turning sentiment around.
However, even as the threat of broader contagion intensifies, investors doubt whether Beijing will “go big”. The results of a Bloomberg survey of readers, conducted last week, revealed that only 11 per cent of respondents believed the government would deploy “bazooka-like” stimulus. Most believed further support would be “moderate” and “targeted”, while nearly a third feared it would be “too little, too late”.
Although this could be interpreted as a sign that China-related assets will surge if Beijing surprises investors by launching a massive stimulus programme, negligible pressure from global markets – which in a major crisis is often the factor that forces the hand of policymakers – suggests China’s problems are not a big worry on Wall Street.
A home is advertised for sale in Arlington, Virginia, on August 22. New home sales in the US rose in July as a lack of existing stock pushed buyers into the market for new builds, government data showed. Photo: AFP
The findings of Bank of America’s latest global fund manager survey, published on August 15, showed that China’s economy did not even figure among the most important “tail risks” in markets. Tellingly, respondents believed that the real estate sector in the US and Europe was a more likely source for a systemic credit event than Chinese property.
The results of these surveys should not be taken as gospel. Even so, they shed light on the relative unimportance of China’s problems to global markets, particularly given the worries over inflation and interest rates in advanced economies.
First, despite the alarmist warnings by some analysts that China is facing a “Lehman moment”, there is little sign that the property-induced turmoil is infecting global markets in any meaningful way. The sell-off in equities this month had more to do with the renewed increase in government bond yields because of fears that borrowing costs will remain higher for longer.
Even emerging markets have been relatively insulated from China’s woes. A JPMorgan index of high-yield, or “junk”, bonds in developing economies excluding China is performing significantly better than the broader gauge which includes China. “Despite concerns over negative repercussions from China, the rest of the [emerging market] corporate space has not been affected meaningfully,” JPMorgan said.
The fact of the matter is that Wall Street views China’s problems as economic in nature, making investors less sensitive to them but also making it more difficult to assess and price risks accurately. The combination of long-standing concerns over the reliability of Chinese data, the lack of transparency in policymaking and the volatile geopolitical environment poses enough of a challenge to China experts, never mind non-specialist investors.
Second, markets have enough problems predicting the US Federal Reserve’s next move. While Europe is more economically exposed to China, the US – which is a much less trade-intensive economy – relies on domestic consumption to drive growth. This explains why US markets are relatively disconnected from the rest of the world and why Wall Street has a laserlike focus on the strong US labour market, which increases the risk the Fed might have to raise interest rates again.
This does not mean China does not matter to global markets. Between the end of 2013 and mid-2016, China was the main tail risk in markets, according to Bank of America’s fund manager survey. Yet, just like today, it was China’s economy – as opposed to the threat of a systemic financial crisis – that unsettled investors, limiting the fallout.
With a state-owned banking system and capital controls in place, China is less likely to experience a Lehman-type collapse. While Beijing must still stop the rot in the property sector, this is not an overriding concern on Wall Street.
