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China is now an unlikely safe haven

debtfinancial crisis Ruin and redistribute wealth. They also redistribute worries. Investors find themselves struggling with things they never worried about before. Worse, they worry about things they’ve never thought about before. One example is bank deposits. Collapse of Silicon Valley Bank (svb), depositors have become newly familiar with the nature and limitations of claims they previously took for granted.

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America’s concerns are spreading rapidly to other regions. For example, emerging market investors are beginning to rethink the countries they invest in, svb・Colored glasses. They consider which markets are most exposed to US financial instability and slow growth, and which markets share similar vulnerabilities. , a country suffering from a sharp drop in bond prices? And where in the developing world can depositors look a little capricious? Seen through this lens, one of the emerging markets looks surprisingly strong. In a whisper, can China provide a safe haven for global investors in an era of banking turmoil?

At first glance, the question is silly. Just a year ago, a prominent voice called China “uninvestable.” Those investing in China have to worry about a new Cold War between China and its most important trading partner. This includes the potential to nullify financial sanctions and stifle export controls on China’s most sophisticated companies.

Needless to say, this country also has its own dangers. Untrustworthy real estate developers remain a financial concern.of the Communist Party campaign against inequality It has terrified the most famous entrepreneurs and wealthy families, many of whom are eager to move their money out of the country. The appearance of Alibaba founder Jack Ma in his hometown this week probably provides some comfort. They don’t want visual proof that they are welcome in their home country.

China also has its own banking vulnerabilities. Smaller rural lenders, such as over 120 urban commercial banks and thousands of rural lenders, are not as robust as other systems. They struggle to compete with the big banks for deposits and find it difficult to resist pressure from local governments. Investors should also remember the country’s approach to covid-19. Policy-making was stubborn, capricious, inflexible and unpredictable.

Still, China has some macroeconomic and financial features that look like strengths amid the current turmoil. The country’s outlandish commitment to a zero-corona policy has kept the economic cycle out of sync with the rest of the world. Therefore, it represents a natural “growth hedge”, according to banks Citigroup’s Xiangrong Yu, Xinyu Ji, and Yuanliu Hu. China may be the only major economy to grow faster this year than last year, they said. That means the gap between China and the US growth rates could widen to as much as 5 percentage points, according to sister company The Economist Intelligence Unit.

These same pandemic restrictions have also dampened price pressure. Consumer prices rose just 1% year-on-year in February, a figure that seems to be from a lost era in many parts of the world. China is a country where inflation has been forgotten. Central banks therefore do not feel the need to raise interest rates in a hurry. In fact, policy eased in March, with most banks cutting their reserve requirements by 0.25 percentage points.

Bond prices wobbled during the chaotic abandonment of the coronavirus zero policy. But in China, unlike the US, Europe, or most emerging markets, current yields remain lower than they were at the end of 2020. Those who lost money on wealth management products that invested in bonds fled to savings. Citi economists believe household deposits are now 15.4 trillion yuan ($2.2 trillion) above pre-pandemic trends.

China is not only in a different phase of the economic cycle. It is also in another phase of the financial cycle of fear and complacency. svb‘s rapid collapse was unexpected and devastating. In China, the dangers posed by local lenders are well understood, representing gray rhinos rather than black swans.

Chinese regulators are now in a cautious rather than hawkish mood. They are aware of the financial risks facing local banks but do not want to contribute to them. If another local lender gets into trouble, they may be more forgiving than previously indicated. Officials want nothing to disrupt the economic recovery, which is only months old. The central government “will do everything it can to show an aura of stability,” writes Hause Sohn of the think tank Macropolo. This makes it an attractive window for investors. Authorities are not blind to bank risks, nor are they, unfortunately, keen to materialize immediate risks.

Both sides of the Great Wall

Even a new Cold War may not undermine China’s claim as a hedge. In the Asia-Pacific region, the country’s onshore stocks are already the least sensitive to U.S. growth and financial conditions, according to bank Goldman Sachs. America’s efforts to separate from China, and China’s countervailing efforts to promote independence, could push the market’s fortunes further away from America’s. It would make China less efficient but more resilient. Countries become less attractive sources of growth, but more useful sources of diversification.

China has its own risks. But that’s the point. China’s financial risk is its own, but America’s financial risk soon becomes that of other countries as well. Risks with Chinese characteristics may offer reprieve from risks with global characteristics.

Read more about our column on economics, Free exchange.
American banks are losing hundreds of billions of dollars (March 21)
The Federal Reserve Strokes Capitalism, Trying to Save It (March 16th)
Emerging market central bank experiment risks reigniting inflation (March 9)

In addition, the method of the free exchange column got that name

https://www.economist.com/finance-and-economics/2023/03/30/china-is-now-an-unlikely-safe-haven China is now an unlikely safe haven

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