The war in Ukraine is raging on. With new developments on the frontline over the weekend, investors are watching where Chinese markets are headed in the coming weeks.
China will kick off its annual “Two Sessions” later this week, during which the government will likely set the GDP growth target for 2022 at just above 5%. We should hear more on plans for important projects, updates on infrastructure investment, as well as the all-important property policy.
Early indications have so far been positive: the issuance of local governments’ general and special-purpose bonds has accelerated; 11 provincial-level regions have announced large investment plans, with total estimated investment growing by more than 20% by value; “consumption” and “the digital economy” are some of the terms that have shown up frequently in provincial plans.
By now, the easing bias is firmly in the price. How else could we explain that implied China market volatility remains elevated, but not yet as high as it had been during previous crises? Indeed, it is well below the levels seen during the European sovereign debt crisis in 2011, the bursting of the A-share market bubble in 2015 and the Covid-19 pandemic in 2020.
However, as external uncertainties are set to flare up in the coming weeks, pressure on the Chinese stock market should still persist. Until last Friday, sufficient liquidity had helped calm the market amid epic market gyrations overseas. For instance, the People’s Bank of China (PBOC) injected hundreds of billions of yuan via open market operations last week.
Many believe that uncertainties in the foreign markets may compel the Chinese central bank to ease even more aggressively. If the PBOC does end up easing as aggressively as hoped, it should be considered a cushion policy to insulate the Chinese economy from external uncertainties —such easing will be a red emergency light, aiming to cushion the downside of the economy and the stock market, rather than encouragement for the upside.
In our recent reports, we have repeatedly warned that the biggest risk facing the global economy is Fed tightening even as the U.S. economic cycle starts to decelerate rapidly, while the Chinese economic cycle is stuck in a trough.
The cycles of the two major economies intertwine every three to four years. At such junctures, they will together conjure up significant confluences on the global scene. Momentous historical events tend to happen around these junctures, which is no coincidence. Last time we saw a similar episode was in 2018, when we predicted — against consensus — dramatic market turmoil amid the trade war. As such, the Ukraine war is one of the many manifestations of the end of the economic cycle. It is now a particularly volatile period not conducive to risk taking.
In summary, the Ukraine war will continue to pile on uncertainties at a juncture when the U.S. cycle is decelerating rapidly while China’s cycle is stuck in a trough. The implied China market volatility is elevated, but at levels well below previous crisis episodes. As such, traders may have plunged back into the market too soon on Friday, and pressure on China’s markets will persist.
The war will mean higher oil and commodity prices, and the resulting higher inflation pressure will give the Fed little reason to put off tightening. A strong yuan suggests that the PBOC may not be easing as aggressively as hoped, leaving leeway for monetary policy should uncertainties from the war spill over.
As the Two Sessions start, we will have a better compass to navigate these troubled waters.
Hong Hao is managing director and head of research at Hong Kong-based Bocom International Holdings Co. Ltd.
This article has been edited for length and clarity.
Contact editor Lin Jinbing (jinbinglin@caixin.com)
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