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China, still a 2022 worry

·Editor focused on markets and the economy
·3 min read
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This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

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 risks,” and the possibility of farther-reaching disruptions.

“While policymakers are stepping up efforts to limit the risks to growth from the property sector crackdown by marginally loosening restrictions on financing, the extent of actions outlined to date is unlikely to prevent further defaults or quickly arrest the continued downturn in property sales and construction. This will continue to weigh on activity and financial conditions in coming months,” Eurasia analysts wrote this week.

DBRS Morningstar recently said that fears about the country’s property sector were “sufficiently counterbalanced by economic and policy buffers,” but that other factors may still trigger a downturn. All of which highlights how dependent worldwide growth is on China, and how the bursting of a property bubble can spill over into the region, and the West.

"The longer-term question is: Is China rotating from this rapid growth model to a more mature model with less leverage, less dependence on cheap labor, etc.?" Charles Schwab's Kathy Jones told Yahoo Finance back in September. "That could have ripple effects longer term in terms of growth in the global economy."

By Javier E. David, editor at Yahoo Finance. Follow him at @Teflongeek

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