Investment Institute
Monthly Market Update

China Monthly update: Internal and external challenges remain

  • 26 October 2022 (5 min read)

Full transcript:

Aidan: Hello, welcome to our monthly video. My name is Aidan Yao. I’m the senior emerging Asia economist at AXA Investment Managers.

The Chinese economy continues to confront with a challenging set of internal and external conditions.

Externally, the developed-market economies are suffering from high inflation, rising interest rates and a broad tightening of financial conditions. We see both the US and Eurozone economies entering recession at the start of 2023, which will weigh on China’s exports. In fact, weakness is already evident in China’s recent trade numbers as global growth loses steam.

The financial market impacts are also visible. Tighter monetary policy in the US has pushed the US dollar to a two-decade high, putting pressure on CNY/USD. Note that since the latest depreciation started in early August, the RMB has lost 7% against the USD, but only ½ a percent against a basket of currencies. This contrasts with the April/May episode, when local economic concerns – during the Shanghai lockdown – drove RMB down by 7% against the dollar and almost 5% against the basket. These differences point to the dominance of dollar moves in dictating the current change of CNY/USD.

Given the nature of the recent depreciation, we think the Chinese authorities will continue to monitor the market carefully. They will likely intervene further in case of liquidity shortage, market malfunction or very rapid depreciation, but we don’t see the authorities directly entering the FX market to buy and sell the dollar in an attempt to alter the market trends.

Turning inward, the Chinese economy continues to struggle against the rolling restrictions required to deal with repeated COVID flare ups. Despite the official advises against long-haul travels, mess movement of tourists during the Golden Week still led to another revival of COVID infections. Local governments responded by tightening controls ahead of the all-important Party Congress. The impact on the economy is likely another mini setback to the already fragile recovery.

The property market is also not showing clear signs of improvement. The authorities have stepped up policy supports for the sector, but they appear only enough to prevent a further deterioration of conditions. We think piecemeal policy easing will continue as Beijing tries to manage contagion risk from the sector, but a fundamental solution to the real-estate woes lies with structurally revamping the housing system – a view that was recently concurred by China’s top policy makers. 

Overall, the Chinese markets, we think, are waiting for a clear signal from Beijing on course correction. A continuation of the current pandemic response and ‘prudent’ counter-cyclical policies will not create the necessary conditions for an economic recovery we and the market are looking for next year.

Our expectation is that once the political cloud clears after the Party Congress, actions to recalibrate policies will quicken, paving the way for faster and sustained economic growth in 2023. However, there are significant risks and uncertainties around that baseline view.

Thank you very much, and stay safe.

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