ffinancial crisis Destruction and redistribution of wealth. They also redistribute worry. Investors find themselves agonizing over things they never worried about before. Worse, they fret about things they never thought about before. An example is money in the bank. Silicon Valley Bank collapsed (SVB) In the United States, depositors are reacquainted with the nature and limitations of claims they previously took for granted.
U.S. concerns quickly spread elsewhere, too.Emerging market investors, for example, have begun to reconsider the countries in which they invest, through SVB– Tinted glasses. They want to know which markets are most vulnerable to U.S. financial turmoil and slowing growth, and which markets share similar vulnerabilities. For example, which countries are suffering from stubborn inflation, rapid monetary tightening and sharp falls in bond prices? Where in the developing world are savers looking a little frivolous? Viewed in this light, an emerging market looks exceptionally strong. Whisper it, but can China provide a safe haven for global investors in times of banking turmoil?
On the face of it, this question is ridiculous. Just a year ago, some important voices called China “uninvestable”. Anyone investing in the country has to worry about a new cold war between China and its most important trading partner. That includes the prospect of draconian financial sanctions and stifling export controls on China’s most advanced companies.
Needless to say, the country also presents homegrown dangers. Real estate developers with bad credit are still a financial problem. The Communist Party’s campaign against inequality has terrified the most prominent entrepreneurs and wealthiest families, many of whom are eager to move money out of the country. This week, Alibaba founder Jack Ma made an appearance in his hometown, which may provide some reassurance. But in a normal country, investors don’t crave visual evidence that the country’s most famous entrepreneur is popular in his home country.
China also has its own banking vulnerabilities. Smaller regional banks, which include more than 120 city commercial banks and thousands of rural banks, are less robust than the rest of the system. They struggle to compete for deposits with big banks and find it hard to resist pressure from local governments to lend to big banks. Investors must also keep in mind the country’s response to covid-19. Policymaking is stubborn and capricious, inflexible and unpredictable.
However, China has several macroeconomic and financial characteristics that look like advantages in the current turmoil. The outlandish commitment to the country’s zero-virus policy has kept its economic cycle out of sync with the rest of the world. As such, it represents a natural “growth hedge”, according to Citi’s Xiangrong Yu, Xinyu Ji and Yuanliu Hu. They point out that China may be the only large economy to grow faster this year than last. That means the growth gap between China and the US could widen to five percentage points, according to our sister firm, the Economist Intelligence Unit.
These same pandemic restrictions have also limited price pressure. Compared with a year ago, consumer prices rose just 1% in February, a figure that seems to belong to a lost era in much of the world. China is the land forgotten by inflation. As such, its central bank has not felt the need to hastily raise rates. In fact, it eased policy in March, cutting the reserve requirement ratio for most banks by 0.25 percentage points.
Bond prices did fluctuate during the chaotic abandonment of the zero-coronavirus policy. But unlike the US, Europe or most emerging economies, China’s current yields are still lower than they were at the end of 2020. Moreover, the bond sell-off did not trigger a bank run, it accelerated it. People who lost money on wealth management products invested in bonds rushed into deposits. Economists at Citigroup estimate household deposits are now 15.4 yuan ($2.2 trillion) higher than the pre-pandemic trend.
China is not only in a different phase of the business cycle; it is also in a different phase of the financial cycle of fear and complacency. SVBPart of what makes a swift crash so damaging is that it’s so unexpected. In China, the dangers posed by regional lenders are well known, and they represent gray rhinos rather than black swans.
The tone of Chinese regulators is now cautious, not tough. They are aware of the financial risks facing regional banks but are reluctant to contribute to them. If another regional lender gets into trouble, they may show more forbearance than before. The authorities don’t want anything to interrupt the economic recovery, which is only a few months old. Houze Song of think-tank MacroPolo wrote that the central government “may go to great lengths to project an aura of stability”, even if that requires a “low-key, low-key bailout” of some vulnerable borrowers. This presents an attractive window for investors. The authorities are neither blind to banking risks nor inconveniently keen to materialize them in the near future.
both sides of the great wall
Even a new cold war may not weaken China’s case as a safe haven. The country’s onshore equities are already among the least sensitive to U.S. economic growth or financial conditions in the Asia-Pacific region, according to bank Goldman Sachs. U.S. efforts to decouple from China, and China’s offsetting efforts to encourage self-reliance, could further free the U.S. from the shackles of the market’s fate. This will reduce China’s efficiency but increase its resilience. The country would be a less attractive source of growth but a more useful source of diversification.
China has its own risks. But that’s the point. China’s financial risk is its own, and America’s financial risk quickly becomes someone else’s. Risks with Chinese characteristics can provide some respite for risks with global characteristics. ■
Read more from our economics column Free Exchange:
US banks lose hundreds of billions of dollars (March 21)
Fed kills capitalism to save it (March 16)
Emerging market central bank experiments risk reigniting inflation (March 9)
Plus: How the Free Exchange column got its name