China’s Slowdown Is Being Ignored by Global Macro Managers

Global financial markets are showing few signs of fretting over all the negative headlines from China, however discouraging they may seem.

(Bloomberg) — Global financial markets are showing few signs of fretting over all the negative headlines from China, however discouraging they may seem.

While some corners of the world have felt the pinch, overall risk appetite has weathered China’s economic slowdown, credit-market stress and foreign-exchange turmoil. Global stock returns are in the mid-teens year-to-date, high-yield credit has outperformed and the Bank of America GFSI Market Risk indicator is near the lowest levels of the year.

One reason China is failing to dislodge those feel-good vibes is it’s not actually that bad right now. Iron ore, the one commodity that should be getting hammered by the country’s property crisis, is actually doing rather well as central government investment on infrastructure like railways accelerates.

True, aluminum is down 7% or so this year, nickel has tumbled 32% and the likes of platinum and palladium have also fallen, so it’s not like there’s no impact at all. OPEC+ has been trying hard to support crude and prices are still only little changed year-to-date. But the rest of the world probably won’t mind a measured decline in commodity prices anyway.

Meanwhile, the surprising strength of the US economy both papers over the cracks in global growth and also distorts the view of China’s markets. For example, while dollar-yuan is close to a record high in offshore markets, the renminbi has actually strengthened when compared to a basket of currencies since July and is in line with the five-year average. Likewise, China’s stocks still aren’t at the lows of last year and realized volatility is nowhere near the levels seen in the slide last autumn.

A few more things may be dulling the impact of China’s slowdown. First, the retreat of international money we’ve already seen from Chinese markets means exposure among fund managers is lower than before and probably still bearishly positioned, so any bad economic news has less impact on global portfolios.

Second, there may be some “bad news fatigue” as the credit crisis and slower economic growth have been rumbling on for years now. You could argue the economy is still more or less on target for the government’s goals — it’s just less good than we’ve been used to.

Third, there’s some good news in that Chinese officials are introducing an array of incremental steps to support markets, relations with the US have eased and local-government financing vehicles, which top the market’s worry list, have mostly performed well so far.

There’s also the view that a China slowdown is helpful for the rest of the world in terms of disinflation. The impact may be slight but every little helps feed the “soft-landing” narrative.

So China may just bump along the bottom from here or even form a base from which markets can climb. The PMIs had hints of optimism and — though the longer-term view may suggest a lack of upside — for now it would need an unexpected shock to catch global attention.

  • Paul Dobson is the Executive Editor for Asia Markets. The observations are his own and not intended as investment advice. For more markets commentary, see the MLIV blog

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