Can China save the global economy?

Can China save the global economy?
Analysis
Ahura Chalki
Author:
Ahura Chalki
Published on: 02.07.2022 13:43 (UTC)
Post reading time: 2.5 min
203

Eyes are where that many believe to be the leading cause of these problems.


The latest data from China showed that Friday's manufacturing activity increased the hopes that the world's second-largest economy and the largest factory in the world could open new ways to get out of this mess! Friday's data show that manufacturing activity expanded at its fastest in 13 months in June, affected mainly by the lifting of COVID lockdowns.


Another news from China that can cause more optimism is the government's decision to facilitate foreign investment in its $20 trillion bond market. China is trying to make it more attractive for foreign investors by cutting the service fees, improving overseas access to foreign exchange hedging, and streamlining the process of opening accounts. This decision can make it easier for foreign passive funds to trade Chinese bonds. Focusing on passive funds signals that China is seeking overall investment in its indexes and not specific groups or shares, which can benefit the country's economy. 


At the same time, the stock market in China is getting more interested for many investors as considered a growth market, especially those Chinese equities included in some global stock market indices. We should not forget that the latest deregulation of the e-commerce industry that has been going on in the past 1-2 years has attracted equity portfolio inflows into China.


PBoC monetary policy

People's Bank of China, like a BoJ, continues its dovish policies with more loan facilities and lower rates. While Fed is expected to continue increasing the interest rates this year and even in the first half of 2023, the People's Bank of China is reluctant to increase the rates further. Interesting to know that PBoC governor Yi Gang believes that china's real interest rate is "pretty low." While lower rates can be good for the stock market, on the other hand, it can destroy the bond market that the government is trying to make attractive. Therefore the latest decision was a plus point to make this fading advantage less obvious, especially now that US interest rates should rise relative to China's.


Economic optimistic 

China retail sales slumped during lockdowns that the government had implemented in recent months. Now China has some specific plans for that to increase. For example, home purchase vouchers for shanty town residents in the housing market can create some activities. On the other hand, they are following a significant infrastructure investment. With the consumer market undergoing recovery after lockdowns, substantial infrastructure investments funded mainly by local government special bonds, local government financing vehicles, central government funds, and loans from policy banks in China can encourage the consumers to increase their spending levels that, can lift the GDP.


Bottom line

China is the world's factory, and when the economic environment is good there, it means global consumer demand is increasing, the energy market moves forward, and countries that export raw materials to China benefit from these conditions. Overall, China's growing economy could raise hopes for a soft landing and satisfactory economic growth.


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