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Global Markets Face Possible Reality Check From China Risks

A deserted departure hall at Beijing Capital International Airport in Beijing, China, on Thursday, Aug. 5, 2021. China imposed new travel and movement restrictions amid a delta-driven outbreak thats grown to over 500 symptomatic cases scattered across half the country, as the government stuck to its aggressive containment playbook rather than rely on the high vaccination level of 61%.

Global markets may be failing to properly grasp the risks stemming from China, evidenced by stocks trading at near-record levels.

A major challenge is China’s Covid-zero strategy, which heralds rolling mobility curbs, supply-chain snarls and trade disruption, according to Frances Donald, global head of macro-strategy at Manulife Asset Management.

“What has failed to permeate the markets’ sensitivity is, how is Covid zero in China going to impact the global economy?” Donald said in a Bloomberg Radio interview Thursday. “That’s a global macro story that isn’t priced, even if the bad news for China is directly in Chinese assets already.”

China is currently striving to restrain any widespread virus outbreak and is the last holdout for the Covid-zero approach of closed borders and movement restrictions. If the nation continues with that kind of containment strategy to fight the pathogen, “we’re probably going to see PMIs decelerate, trade weaken and goods activity slow as well,” Donald said, referring to purchasing managers’ indexes.

China stocks have trailed a global equity gauge this year

The MSCI AC World Index is up almost 16% so far this year and now trades near a record high. By contrast, the MSCI China Index is down 14%, squeezed by Beijing’s regulatory crackdowns on an array of industries, including the indebted property sector.

Robust corporate earnings have encouraged the view that global equities can weather the pandemic-related supply-chain disruptions that are stoking inflation and pushing central banks toward tightening monetary policy.

For Jim Veneau, head of fixed income Asia at Axa Investment Managers, the headwinds from China’s property sector and wider economic deceleration are key litmus tests for investors.

The growth slowdown is a “wild card” and is “going to have global implications,” he said. “There’s still a desire to get leverage levels in the economy down through market mechanisms — there’s a willingness to bear a little pain or spread the pain.”

Data released this month showed a sharp slowdown in Chinese growth to 4.9% in the third quarter from a year earlier, compared with 7.9% in the previous three-month period.


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