Chinese authorities are taking measures to boost bank lending and equity markets. However, it seems unlikely that these actions will reverse negative investor sentiment significantly. Beijing’s focus on national strategy points to potential deflationary risks as China prepares for global decoupling without genuine reflationary measures.
Global investors have remained pessimistic about Chinese assets despite recent attempts by Beijing to support growth and markets. This pessimism appears deeply rooted, and short-term “market rescues” have failed to change the overall trajectory. Achieving a sustainable turnaround would necessitate credible reflationary policies and structural reforms, which policymakers are unlikely to implement.
China’s economic landscape has transformed since the pandemic. Despite pro-growth measures and the easing of pandemic restrictions, households remain cautious about their economic circumstances. Foreign direct investment inflows are contracting, marking a significant shift. Factors contributing to this pessimism include pandemic restrictions, industry crackdowns, geostrategic tensions, and turmoil in the property sector.
China faces increasing pressure to achieve self-sufficiency across multiple industries due to global decoupling. While it has succeeded in some sectors, others present challenges. The pursuit of national security and strategic resilience has led to intensifying trade disputes, hampering the flow of technology and resources. This closed approach could perpetuate excess savings, hindering progress toward a more open financial system.
China may face persistent deflationary risks as it continues to build capacity using household savings. Although Beijing has the policy tools to stabilize domestic inflation, various considerations limit their use. The incremental approach that characterizes Chinese policy may continue, driven by national strategy and concerns about capital outflows and commercial banks’ support for strategic industries.
China’s current policy landscape prioritizes strategic interests over destabilizing reforms. Measures like changes to retirement age, property tax, urban planning, and financial liberalization are taking a backseat to more pressing strategic priorities. China now appears to be a more risk-averse nation.
Given the changing landscape, we have removed Chinese debt and equities from our strategic asset allocation. From a tactical perspective, it is too early to adopt a positive view on Chinese assets, including stocks, bonds, and the yuan. We view China as just one constituent among many in our emerging market equity and hard currency debt allocations.
While Chinese deflation presents domestic challenges and dampens global growth prospects, it helps alleviate inflationary pressures in developed economies. We anticipate that developed market central banks will cut interest rates in the coming months, supporting domestic growth. These factors, along with increasing geopolitical risks, reinforce our preference for core portfolio holdings, such as US equities and high-quality fixed income.