Why has the world seemingly become desensitised to China?

Evergrande- China’s second largest property company, is thought to be teetering on the edge of bankruptcy, with possible adverse consequences for the sector and maybe beyond. 

There was a time when economic, political and financial developments in China, and between China and its peers, such as the US would have big ripple effects outside the country. But not anymore it seems. Evergrande- China’s second largest property company, is thought to be teetering on the edge of bankruptcy, with possible adverse consequences for the sector and maybe beyond. But it is the latest example of strains that have barely raised attention internationally, let alone impacted financial markets materially. Why has the world seemingly become desensitised to China, and will it change?

The world would seem pretty sensitive to developments in China before Covid-19. For instance, the country’s aggressive fiscal easing in the wake of the global financial crisis was a key factor helping the globe to recover and, in the process, seemed to make international markets more sensitive to China. And then there was the trade war with the Trump administration which certainly consumed huge column inches in the press and, from time to time, seemed to impact global financial sentiment. Of course, this trade war is not over; the phase one trade deal with the US still requires China to uphold a USD200bn target for increased imports from America and, of course, most of the tariffs are still in place.

Some might even argue that strains have intensified between China and the West, with the US/UK/Australian security deal for the Indo-Pacific region the latest case in point. And then there’s the financial vulnerabilities in China as I have mentioned with Evergrande, and there’s clearly more besides. But again, financial markets seem desensitised; the stock market has generally been very strong, up until recently and the renminbi has been stable (in fact continuing to rise quite strongly in trade-weighted terms). Even broader concerns about China’s Covid difficulties and the resultant weakening of the economy seem to have passed other financial markets by.

Mr. Steve Barrow, Head of Standard Bank G10 Strategy suspected that there would be no one reason for this apparent lack of sensitivity overseas. One could be that, unlike the global financial crisis, China cannot be the engine for global recovery post-Covid. All countries, including China, are directly affected by Covid; China was not a direct victim of the global financial crisis unlike the US or UK. Global investors know this and hence they rely on other things to boost growth and financial market sentiment; notably easier fiscal and monetary policy from major developed nations. Another issue is that the trade war with the US appeared to further slow the progress of globalisation, which had really elevated China’s global role following its accession to the WTO in 2001. Global firms may have sought alternative supply chains, making them less directly dependent on China.

The lack of international sensitivity to the travails of Evergrande may reflect the fact that such financial strains in China have been seen for some time as a slow-motion train wreck, not something that has suddenly appeared. History is littered with financial collapses that came out of leftfield: LTCM, Barings, Lehman and more. When these happened, there were inevitably significant domestic and international reverberations. China’s different financial support structure and the elongated nature of the difficulties might have desensitised global markets to the strains that seem to be coming to a head right now in the case of Evergrande.

But just because global markets seem relatively disinterested in China right now does not rule out the possibility that the sensitivity will return. After all, China is still vying with the US to be the biggest economy and all the while, it continues to make efforts to internationalise markets, and gets rewarded for doing so in terms of not just capital inflows but also things like entrance into the World Government Bond Index (WGBI). Mr. Steve Barrow suspects that once sensitivity to Covid retreats and once developed-country central banks have normalised monetary policy, global markets will return to focus more on Chinese developments. But that’s something that could still be a couple of years away.