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While the S&P 500 continues to rise and the overall U.S. economy remains resilient, pessimism about China continues to grow, with Chinese stocks in Hong Kong falling to their lowest level in 19 years.
What could account for this disparity?
In short, different geopolitical and economic contexts. While business activity continues to hold up in the U.S. and expectations of a monetary turnaround are rising, the Asian dragon is suffering in a big way.
To begin with, analysts question the fact that the Chinese economy will grow by 5.2% in 2023, above Beijing’s official target of around 5%, because the country’s GDP was reported in real terms.
It is mentioned that as consumer and factory prices fell last year, the price adjustment actually inflated the growth rate. The GDP deflator is now the largest “inflator” of the GDP calculation in 14 years.
In addition, news that China is considering issuing 1 trillion yuan in new special sovereign debt, the fourth such sale in the last 26 years, did little to help the market mood.
The PBOC’s decision to leave its policy rate unchanged, while the unemployment rate stands at 14.9%, also dampened investor enthusiasm.
Finally, there are fears of further geopolitical turmoil due to:
– Growing tensions with Taiwan due to the victory of the independence movement in the elections.
– Victory of a candidate with hostile rhetoric towards China in the U.S.
Overall, Chinese stocks could remain under pressure due to negative expectations about the real estate market and the economy in general, while U.S. stocks maintain the bullish trend (for now).
The good news is that if the Asian dragons continue to slow down, commodities, mainly oil and gas, could fall in price as demand slows. But whether this happens depends primarily on the government.
If Beijing decides to stimulate the economy and deflation returns to inflation amid a pickup in consumer and business activity, things could go awry.
