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Friday, December 17, 2021
As ever, we can’t forget about China
The world’s largest economy — rife as it is with attendant crises, policy shifts and political intrigue — is a constant focus for investors. Therefore, it’s sometimes easy to lose sight of what’s happening in the second largest.
The ongoing turmoil of Evergrande, which ricocheted across markets a few months ago and is now being sued for over $13 billion by creditors, is a stark reminder that while China isn’t quite falling apart, it’s not exactly an island of stability either.
In fact, Deloitte’s fourth quarter CFO Signals survey, released on Thursday, found that finance chiefs are getting gloomy about what 2022 has in store for the global economy — and China is a particular worry after a surprisingly sluggish 2021.
The firm’s data found that 45% see North America as better, compared to 54% in Q3; meanwhile, only 27% think China will be better, which is down from a whopping 55% last quarter. Currently, Deloitte found that “29% of CFOs see current conditions as good or very good, a significant decline from 52%” in the Q3.
So what gives?
Evergrande’s woes are certainly one element, but Beijing’s increasingly antagonistic relationship with the U.S. — and the raging COVID-19 pandemic — are arguably even bigger factors. In research this week, Goldman Sachs cited the potential for border restrictions stemming from the Omicron variant as a concern for Asia-Pacific growth.
While not the firm’s base-case, zero-COVID lockdown strategies in China, Hong Kong and Taiwan are a potential wild card, “especially if Omicron proves similar enough to existing variants in terms of health consequences.”
According to Goldman, “back-of-the-envelope calculations suggest that a return to restrictions half as severe as during peak Delta could cut 1-3 [percentage points] from first-quarter GDP in most regional economies.”
With the Federal Reserve’s hiking campaign stealing the spotlight for markets as it tries to make up for lost ground on inflation, Pacific economies are in a more mature phase of their expansion.
“Many of the Asian economies that were the first to recover in 2020 are now further along in their cycles versus other parts of the world,” Henry H. McVey, KKR’s head of global macro and CIO, wrote recently.
“Remember, for example, China was the first to rebound after the pandemic, and as a result, it actually started tightening monetary policy in 2020,” he added.
Recently, Beijing has moved to assuage concerns about the economy, and alleviate investors concerns by cutting reserve requirement ratios for banks. However, Eurasia Group pointed out that Evergrande is heightening fears about “systemic…
Read More: China, still a 2022 worry: Morning Brief