Three key implications of slowing economic growth in China for financial markets – CE

China’s economy was among the fastest-growing in the world last year. This year, though, it is clearly on a different trajectory. The latest activity data for April reinforced the message that the country’s economy is clearly slowing, as it drifts back to its pre-pandemic trend and authorities remove policy support.  Economists at Capital Economics think this slowdown – in the face of surging economic activity in much of the rest of the world – has three implications for China’s financial markets. 

Assessing the market implications of slower growth in China

“We expect the country’s stock market to continue to underperform those elsewhere. It has already fared relatively poorly so far this year as domestic economic growth has slowed, and as investors have begun to factor in an unwinding of the boost its large information technology sector received from pandemic-related demand. We suspect these factors will continue to weigh on earnings growth in China’s stock market for some time and doubt there is much scope for this to be offset by higher valuations, either.”

“We expect China’s long-term government bond yields to decline. We don't think there is much chance that the country’s central bank will hike its policy rates this year, and with growth staying slow, we expect investors to increasingly anticipate looser monetary policy further down the line. We forecast the 10-year Chinese government bond yield to reach 2.9% by the end of 2021, from ~3.1% at present.”

“We expect the renminbi to depreciate against the US dollar. We suspect the dollar’s recent broad-based weakness will prove temporary. And we think the fundamentals point to a significantly weaker renminbi. The upshot is that we forecast the renminbi to fall to 6.7/$ by the end of the year, compared with ~6.4/$ at present.”