China has a deflation dilemma Is there a way outAs China grapples with declining property prices and financial challenges among its large real estate developers, the alarm bells are ringing for some observers.
They see shades of the 2008 financial crisis, predicting doom for China’s economy due to years of alleged over-investment and unproductive ventures. But surprisingly, markets are telling a different story, one that’s not fraught with impending catastrophe.
China Banks & Bonds: Defying the Norms
To begin with, bank performance typically foreshadows an impending financial crisis. History shows that banks’ share prices dive months before any major financial debacle – like the S&P’s plummet before Lehman Brothers’ fall in 2008, or European banks shedding value before the euro crisis.
In stark contrast, Chinese bank shares have grown by 2.4% over the past year, outpacing even US banks by a staggering 12.6%. It’s hard to pin down a financial disaster where local banks outdo their US counterparts by such a margin.
So, is this an unprecedented scenario, or are the dire predictions simply off the mark? Moreover, Chinese government bonds have surprisingly outperformed traditional safe investments like US Treasuries.
Where both yielded similar returns before the pandemic, since early 2020, long-dated Chinese government bonds have soared by 17.1%, while US Treasuries have dipped by 13.4%.
Again, we’re left with an intriguing question: Is it unprecedented for a country, supposedly on the brink of a financial crisis, to see its bonds outdo US Treasuries by over 30% in under three years?
Not All Signs Point to Crisis
Doubters might dismiss market indicators, arguing that Beijing’s influence can distort signals. But casting the net wider reveals even more anomalies. Commodity prices, especially China-sensitive ones like iron ore, have risen substantially, contradicting notions of a struggling Chinese economy.
The surge in share prices for China-reliant Western brands like LVMH, Hermès, and Ferrari further muddies the waters. If China were truly teetering on the edge of a systemic crisis, these brands, particularly luxury ones, shouldn’t be thriving.
It’s also worth noting that not all economic indicators in China are bleak. The resurgence of tourist traffic in Macau and a buoyant domestic tourism sector offer glimmers of hope.
Even with minor hiccups in June and July, car sales have remained robust throughout the year. And let’s not overlook the recent uptick in sales growth reported by retail giant Alibaba.
Of course, it’s not all sunshine and rainbows. China’s economy has its fair share of challenges. Economic growth, both cyclically and structurally, is indeed decelerating.
But the chasm between most China-related assets’ performance, both domestically and internationally, and the widespread apprehensions of an imminent systemic disaster is too vast to ignore.
Bottomline is while it’s easy (and perhaps tempting) to view China’s current financial situation through a 2008 lens, doing so might be a simplistic and flawed approach. The markets are sending a clear message – one that doesn’t necessarily align with the doomsday narratives.
Those predicting China’s economic implosion might want to re-evaluate their metrics or at the very least, approach the subject with a more critical lens, questioning popular sentiment.
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