Vast inflows are flooding the Chinese stock market
This may be the year that we see a great divergence take place in the global economy and markets. As investors and commentators in Europe and America fret about a recession, those who look east towards China see the opportunity for robust economic growth. After the Chinese government lifted its Zero Covid policies, forecasters now expect to see annual GDP growth march forward at over 5%.
Markets are buying into the narrative too, with huge capital inflows already flooding Chinese stock markets. This is happening at the same time as investors managing pension funds and other big pools of capital pull out of American stocks that they have been in since 2005. Evidently, Beijing is expecting plenty more capital to flow in throughout 2023, with government officials saying that they anticipate a “steady and continuous” stream of capital into the country.
The Chinese economy looks a lot different today from how it did in the past. Since the pandemic, China has pivoted its export base away from the wealthy economies to the poorer developing ones. Between 2019 and 2022 Chinese exports to developing economies almost doubled, and now rival its exports to developed economies. “This is by far the most important event in the world economy since the rise of China,” writes former Wall Street economist David Goldman.
Taken together, these seem like enormous developments. China has managed to diversify its economy in such a way that it seems unthreatened by a recession in the developed world. That is a remarkable achievement, but it could also have political and economic consequences among the most economically comfortable countries. For one, Chinese prosperity no longer requires exports to the West. China has, for all intents and purposes, become a truly independent growth model.
There are still some risks on the horizon for the Chinese economy. The property sector remains on shaky ground and commentators are predicting the imminent collapse of the market and the national banking system. If property prices and investment ever fell and the Chinese government let the financial system go into free fall, the country would experience a crisis much like what the West went through in 2007-08.
But there is good reason to think that the Chinese government has this under control. It dealt successfully with a similar burst bubble in the late ’90s, and it looks set to deal with it again. Besides, those predicting a crash in the Chinese property market have been wrong for nearly two decades. I should know — I was one.
As capital flows into China, the financial sector in the developed world faces mass layoffs. Banks are preparing for the largest round of job cuts since the financial crisis of 2007-08. Financiers are a notoriously mobile bunch. With many of them facing the dole queue, is there a chance that some might follow the money and go to China? It’s a long way down the line, but not out of the question.
It is unclear what new world emerges from these trends. But to have one half of the global economy tipping into recession and the other expecting high growth is extremely unusual. The consequences could be even more so.