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China moves to stabilise markets

New policy designed to help stabilise the Chinese markets as Covid continues to hit the economy hard.

| 8 min read

On Tuesday, the Chinese authorities decided to respond to the run of weakness in their currency and stock market. The Central Committee for Financial and Economic affairs was chaired by President Xi himself to give it greater authority when sending out the message that they want the markets to stabilise.

Various measures were taken. More credit will be available following a further reduction in the commercial banks reserve asset ratio. State infrastructure programmes with an emphasis on coal exploration and new energy will be increased.

The foreign exchange reserve requirements for banks were also cut from 9% to 8% to offer support for the home currency.

President Xi also recently chaired the committee to toughen policy against the Covid outbreak. He is hoping tougher policy will mean an earlier victory, as the Covid restrictions are one of the main worries upsetting the markets. They are proving disruptive of production and consumption and will mean a weaker second quarter this year. The two parts of his policy are pulling against each other.

The Chinese stock market peaked in a speculative frenzy in 2015 and has stayed well below those levels ever since. By the time of the new interventions, the Shanghai index had fallen by 20% this year, with a particularly bad performance over the previous five days. The misery for many overseas investors has been compounded by a weak renminbi currency, down from 6.31 to the dollar at its high in February, to 6.55 now. Our caution about the outlook has been vindicated. The economy has been damaged again by the revival of Covid-19 cases and the zero-Covid policy. This has required extensive lockdowns of cities and regions in China to try to eradicate the virus.

The estimates of 5.5% growth this year are being revised down by independent forecasts to something more like 4%.

The government continues with its tough-love approach to the property sector, hitting the business models of private sector developers and slowing the housing market substantially. Policy centres around more government involvement in a range of activities, more transfer of business to state-owned enterprises and a continuing reluctance to countenance another debt-fuelled bubble of any kind. The recent better profit figures for March mainly were buoyed by good results from large state-owned enterprises in the energy sector.

The People’s Bank of China - the central bank - stresses the need for price stability. The official CPI index shows price rises at just 1.5% over the last year, despite the severe international pressures on energy, commodity, and food prices. The Bank targets money supply growth and keeps this in line with nominal GDP. Markets had been expecting more monetary relaxation than has so far been experienced. Its absence shows that the central bank still believes its central duty is to keep inflation under control in contrast to western central banks. The Governor has recently stressed that he follows a twin-track approach, adding work with the government on real economy policies as a necessary complement to controlling money and credit. He argues that “safeguarding grain production and energy security is crucial for price stability. China has basically realized grain production self-sufficiency” and has promoted domestic energy and stable import arrangements for fuel. These views are reflected in the latest announcements showing government and Bank working together. Clearly this week the Bank has been told to be a bit more accommodating as recent market falls were too fast for the comfort.

President Xi has been out and about ahead of his wish to be elected to an extended term beyond the usual two five-year terms he has now almost served. His power is strong, and he is likely to secure his wish later this year at the 20th CPC Congress. He will use the platform of that meeting to set out a blueprint for China’s development in the second centenary of communism. His “thoughts on socialism with Chinese characteristics for a new era” will be honed for a vision to “build China into a great modern socialist country”.

In recent weeks he has addressed the Forum for Asia Conference, talked of the role of education in Chinese evolution, thanked all involved for a successful winter Olympics and has led the assertion of a toughened net-zero covid response. In his outward looking address to Asian nations, he made no reference to Russia or Ukraine whilst speaking of the need to safeguard peace, uphold the international order and resolve conflicts by talking. He also spoke of China pursuing a more open approach to trade, seeking to “build an open world economy, stay(ing) on top of the dominant trend of economic globalisation.” He claimed to reject a competing bloc approach to global relations. The Chinese characteristics in his eulogy for a world peace based on UN rules was inscrutably wrapped up in the wish to respect the sovereignty of every country and not interfering in the internal affairs of other countries. The problem with that formula is how you define a country, with China seeing Taiwan as part of One China. He did not opine on the status of Ukraine vis a vis Russia and failed to apply the doctrine to a Ukraine which sees itself as independent.

Any investor looking at the world economy and markets needs to understand China.

As the world’s second largest economy with a likely longer-term growth rate usefully above the west, all the time Chinese incomes are well below western ones it will be a growing presence in the world economy. It is also the main manufacturer supplying international markets with fabricated products, the biggest user of fossil fuels and many commodities and the biggest emitter of CO2 by far.

Recent years have seen good growth, but this has not been reflected in stock market valuations. The big role of the state, the sometime hostility to entrepreneurs that are too successful and the wish to squeeze speculation and too much credit out of the system have conspired against foreign holders of financial assets. Anyone looking for a cheaper entry point into Chinse markets needs to weigh the trend of policy towards more nationalisation and more government intervention in a range of goods, energy, and food markets. Allowing foreign owners of capital to make money is not a priority of this President.

ESG investors will need to ask questions about the world’s largest CO2 producer planning to emit more CO2 in the next few years ahead, and to ask about human rights and governance standards. Clearly the recent decision to try to prop markets is more positive after a period when the authorities seemed unconcerned about poor asset price performance. They may need to do more depending on how long the Covid disruption lasts.

The big problems Xi faces are twofold. As he exerts ever more authority and control, how will he ensure honest advice and warnings that any good leader needs? So far there are some signs of active debates within a wider leadership group about how to achieve the aims Xi sets out. As he and the government intervene more widely and act through the public sector more extensively, how can he at the same time pursue market liberating and opening policies that will create a welcome for foreign capital and innovation? When talking abroad he speaks of globalisation, more trade, and the paths of peace. At home he prepares for self-sufficiency in all that matters, develops a digital world to different standards and purposes than the west, and re arms.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

China moves to stabilise markets

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