Don't Panic Over China
At the dawn of the year of the rooster, China’s economy is as leveraged as ever, with credit still outpacing growth.
Yet there’s a difference from past years: an absence of turmoil in financial markets. Swings in the yuan are at a three-month low. Volatility in stocks in Shanghai is near the least since 2014. Bond yields have retreated from a 1 1/2-year high.
This all comes after two bumpy years featuring a surprise currency devaluation that roiled markets globally, a stock-market crash and a sell-off in bonds. Panicking over China seems out of fashion.
One reason: economic expansion has steadied, allowing the central bank to mount a modest tightening in funding conditions that’s offered support for the yuan without threatening growth. External conditions are favorable too, with the dollar pulling back. A key backdrop for China this year: a critical gathering of the Communist leadership this fall where the next generation of top officials is scheduled to be picked.
While U.S. President Donald Trump called for tough measures against China on the campaign trail, there’s been no specific move yet to curtail imports from America’s top trading partner. Skeptics say the China market tranquility is a sign of complacency. Goldman Sachs Group Inc. last week warned that it comes at the cost of rising credit and other imbalances.
Even so, the following four charts help illustrate why China for now has retreated down the list of investors’ worries:
Implied volatility in the yuan has dropped along with the dollar amid doubts over Trump’s reflationary agenda and as fund outflows showed signs of slowing due to tighter capital controls.
The Shanghai stock market isn’t swinging so wildly any more. The interest of China’s dominant retail investors hasn’t returned since the crash in 2015, and more funds are entering Hong Kong shares through a connect program, propelling the local benchmark to a 1 1/2-year high.
China’s latest economic data from exports to new credit have beaten estimates after growth accelerated last quarter for the first time since 2014.
Even bond yields, which jumped the most since October 2010 last month, have dropped lately as the People’s Bank of China resumed fund injections.
Though concerns over tightening, as seen in Friday’s jump in money-market rates, illustrate the continuing dangers of China’s record leverage, it’s other international risks that have been the focus of global market attention — with looming elections in France, continuing debt problems in Greece and Britain’s struggles with Brexit.
“When you have a global risk-off, that tends to be positive for the U.S. dollar and negative for emerging markets including China — and that’s going to add more pressure to the stability” in China, said Ken Peng, Hong Kong-based investment strategist at Citigroup Global Markets Asia Ltd. “Domestic problems are more limited” because “for a while you’re not going to have really a problem of refinancing and default risks,” he said.