Thanks to a strong comeback from pandemic lows, the Chinese economy is back above its pre-pandemic levels. The outlook remains positive, but slower growth is forecast.
The Chinese economy has been one of the engines of global growth for decades. Right before the release of the second quarter GDP figures, the People’s Bank of China announced more support for the economy.
In the developed world, the expectations are that the major central banks will reverse their accommodative measures in the months ahead, or at the very least signal their intention to do so.
As the Chinese economy has been the first to recover from the pandemic effects, the expectations were that increased global demand would support its growth. The pandemic has changed the way countries view trade however, as dependency on China was one of the major problems in the fight against the pandemic.
The People’s Bank of China announced recently that it had cut the reserve requirement ratio for most banks, thereby reducing the amount of cash banks must hold in reserve.
More Support from Chinese Authorities
The chart above shows the actual path of Chinese real gross domestic product (in red) from 2019 onwards. At the same time, the yellow dotted line shows the IMF’s projections as outlined in its World Economic Outlook published before the COVID-19 shock hit.
We see a deceleration of growth in the period ahead, calling for more action from the Chinese central bank. As such, one should not be surprised to see further support countering a more pronounced slowdown, both from the monetary and fiscal space.
The Chinese economy is a major driver of volatility in financial markets. A recession in China usually triggers a recession in Asia and has a negative impact on the rest of the world. The first to react is the Australian dollar, as the majority of Australian exports go to China.
Looking ahead, a neutral stance on Chinese equities is needed. If the central bank increases its accommodative measures, the move should further boost the Chinese equity markets.