China’s economy has been facing some challenges in recent months, such as the regulatory crackdown on tech giants, the power shortages, the property sector woes, and the Covid-19 outbreaks. However, the financial markets are not signalling doom and gloom for the world’s second-largest economy, according to a Financial Times article.
Market indicators show confidence in China’s growth prospects
The article cites several market indicators that suggest investors are still confident in China’s growth prospects and policy responses. For example:
- The yuan has been strengthening against the US dollar, reaching its highest level since June 2018. This reflects the confidence in China’s current account surplus, foreign exchange reserves, and capital controls.
- The 10-year government bond yield has been stable at around 3 per cent, despite the recent interest rate cuts by the People’s Bank of China (PBOC). This indicates that investors are not worried about inflation or fiscal risks.
- The equity market has rebounded from its July lows, with the CSI 300 index up by more than 10 per cent. This suggests that investors are optimistic about the earnings prospects of Chinese companies, especially those in the consumer, health care, and green sectors.
- The credit default swap (CDS) spreads of Chinese sovereign and corporate debt have narrowed significantly, implying that the default risk of China has declined. This reflects the expectation that the authorities will manage the debt problems of Evergrande and other property developers without triggering a systemic crisis.
China’s economy is undergoing a structural transformation
The article also argues that China’s economy is undergoing a structural transformation that will make it more resilient and sustainable in the long run. Some of the key features of this transformation are:
- A shift from export-led to domestic consumption-led growth, supported by the rising income and spending power of Chinese households.
- A transition from high-speed to high-quality growth, driven by innovation, productivity, and environmental protection.
- A diversification from manufacturing to services sectors, especially in areas such as education, health care, entertainment, and tourism.
- A rebalancing from investment to consumption, with a focus on improving the quality and efficiency of public infrastructure and social welfare.
The article concludes that China’s economy is not heading for a hard landing, but rather a soft landing that will allow it to achieve its long-term goals of common prosperity and carbon neutrality.