Monthly update on Asia & China Market: Is the recovery sustainable?
The global economy remains in a precarious spot, while China’s road to recovery remains bumpy and uncertain.
Aidan: Hello, welcome to our monthly video. My name is Aidan Yao. I’m the emerging Asia economist at AXA Investment Managers.
The global economy remains in a precarious spot.
In the US, stagflationary forces are gaining strength, with inflation surprising persistently to the upside, while the economy has struggled against the tightened financial conditions. This has seen the bond market price in aggressive rate hikes by the Fed in the near-term, but followed by rate cuts starting as soon as the middle of 2023.
The European economy may be teetering even closer to the edge, given the risk of an energy crisis if Russia cuts its gas supply. The repercussion could be a GFC-style collapse of economic activity as Europe heads into the winter season.
These paint a worrying picture for China’s external backdrop. However, the key drivers of the economy remain domestic. Q2 GDP showed a collapse of economic growth to just 0.4% the lowest since the initial wave of the pandemic. The cause was the brutal hit from the drastic lockdowns that engulfed Shanghai and the surrounding provinces. The disruption to supply-chain and consumer/business demand led the entire Chinese economy to almost a standstill.
Since Shanghai’s lockdown was lifted, there has been a mixed bag of news. On the positive end, the recovery was faster and stronger than the market had expected, as reflected by the June data. However, the most recent developments have casted some doubts over the sustainability of this recovery. Namely, the COVID flare-up since July has led some local governments to reactivate social restrictions, even though we think the bar for a Shanghai-style lockdown is very high. In addition, the suspension of mortgage payments by some home-buyers who face delayed delivery of their pre-paid properties could create an domino effect that spreads the real estate woes to the banking system and the wider society.
All of these point to an economy, which is far from out of the woods. Further policy easing and official intervention are needed, urgently, to address COVID and the housing market problem – the two biggest impediments to the ongoing economic recovery. We continue to expect a sequential growth rebound in the second half of the year, but the path ahead will remain bumpy and uncertain. Investors should, therefore, remain prudent and selective in navigating the highly volatile market environment ahead.
Thank you and stay safe.