China’s economy is stumbling, but financial markets don’t indicate that it will lead to a systemic crisis.
That’s according to Louis-Vincent Gave, CEO of Hong Kong-based financial services company Gavekal.
“The curious thing, though, is that such doom and gloom is not reflected in what the market is signaling.”
China’s economic turmoil has raised fears of a global crisis similar to the 2008 financial crash, but several market indicators suggest otherwise, veteran financial analyst Louis-Vincent Gave said.
To be sure, the world’s second largest economy is facing cyclical and structural problems, the CEO of Gavekal, a Hong Kong-based financial services firm, wrote in the Financial Times.
“Given that a systemic crisis in China would reverberate around the world, this has raised alarm and triggered calls for Beijing to intervene more forcefully to revive the Chinese economy,” Gave wrote. “The curious thing, though, is that such doom and gloom is not reflected in what the market is signaling.”
After a first-quarter bounce, China’s economic rebound from zero-COVID policies has been disappointing, with factories and consumers slowing down.
In addition, the property market continues to crumble under the weight of debt and defaults, youth unemployment is at a record high, and consumer prices have hit deflation territory.
Meanwhile, foreign investors have withdrawn in droves, with Beijing’s attempts to support its markets failing to produce a sustained rally.
But Gave cited other indicators that present a different take on the Chinese economy.
Focusing on the banking sector, he noted that the share price performance of lenders tends to drop months ahead of any systemic crisis, as had happened before 2008 global financial crisis.
Instead, bank shares measured by the FTSE China A-share bank index have gained 2.4% in the last 12 months, outperforming US lenders by nearly 13%.
Similarly, Chinese government bonds are beating US Treasurys, with long-duration bonds returning 17.1% since January 2020. That’s compared to a negative 13.4% return from T-bill counterparts.
Gave also pointed out that iron ore prices, which are sensitive to China’s economy, have jumped 50% from their October 2022 low.
Meanwhile, shares of China-sensitive luxury companies like LVMH, Hermès, and Ferrari are trading at or near all-time highs, he added.
“That is not to deny that China’s economy faces genuine challenges or that Chinese economic growth is slowing, cyclically and structurally,” he concluded. “But in short, there seems to be a strong disconnect between the price behavior of most China-related assets, whether at home or abroad, and fears of an unfolding systemic crisis.”
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