- The divergence of China’s economic policies and performance from the rest of the world, particularly the West, has fed the decoupling narrative
- But global trade and investment flows show the opposite is happening – foreign businesses and funds remain highly invested in Chinese markets
In the third quarter of last year, China’s economy almost ground to a halt on a quarter-on-quarter basis, struck by the triple whammy of a property downturn, crippling energy shortages and the government’s zero-tolerance approach to containing the Covid-19 pandemic.
However, in the European Union, gross domestic product expanded by a stronger-than-expected 2.1 per cent in the third quarter of 2021. What is more, economic output across the entire OECD club of rich countries surpassed its pre-pandemic level. In financial markets, the benchmark S&P 500 equity index managed to stay in positive territory for the quarter despite a sharp sell-off in September.
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All this data feeds a narrative that the global economy and markets are decoupling from China. Exponents of the decoupling thesis point to emerging markets in particular, which are less correlated with Chinese growth than they were a decade ago.
In a provocative report published last October, Goldman Sachs argued that China should be treated as a separate asset class and dropped from emerging market stock indices to help investors exploit opportunities in other major developing economies.
Yet, it is the trade war and pandemic that have given decoupling enthusiasts a new lease of life. Beijing’s prioritisation of economic control over growth, coupled with its virus-induced policy of enforced isolation, have accentuated the shift towards self-reliance. China’s efforts to reduce its dependence on foreign technology, and place more emphasis on boosting domestic demand, attest to an economy turning inward.
The government’s widening crackdowns on private enterprise, and the increased regulatory scrutiny that brought about last month’s delisting of Chinese ride-hailing group Didi Chuxing from the New York Stock Exchange, have reinforced a perception of a financial parting of the ways between China and the West.
The decoupling narrative has been given added impetus by fears about pandemic-induced deglobalisation, notably a shift in supply chains away from China. It has also been supported by the vaccine-driven outperformance of advanced economies and, crucially, the unprecedented levels of monetary and fiscal stimulus that have supercharged the rally in asset prices and increased the resilience of developed markets.
Yet, a cursory glance at global trade and investment flows over the past several years shows the decoupling thesis does not stand up to scrutiny.
First, while China’s economy may be turning inward, there is little evidence that deglobalisation is taking hold, or that foreign firms are pulling out of China. The global trade-to-GDP ratio peaked just before the 2008 financial crash and has fallen only modestly since.
The findings of the American Chamber of Commerce in Shanghai’s latest China Business Report, published last September, revealed that 72 per cent of 125 respondents had no plans to move any production out of China in the next three years, and only two firms planned to shift all their production out of the country.
Moreover, despite the slowdown, nearly 60 per cent of firms increased their investment in China last year compared with 2020, a similar percentage to in 2018.
Second, China’s economy remains a crucial driver of the earnings of multinational firms. While the nation accounts for just 5 per cent of the sales of the S&P 500, Chinese growth matters more to the earnings of S&P 500 companies than US growth because of “China’s growing share of the global ecosystem”, Bank of America noted in a report published last September.
Tesla, which on Sunday announced it had exceeded its own record production volume last quarter, has aggressively scaled up production at its plant in Shanghai, helping the electric carmaker overcome supply constraints.
Meanwhile, Apple, which on Monday became the first company to hit a market capitalisation of US$3 trillion, surpassed Vivo last October to become the top smartphone brand in China.
Third, rather than parting ways with Wall Street, China is opening its doors to Western investment banks and asset managers. Several prominent US and European financial companies, including BlackRock and Amundi, have gained approval for wealth management partnerships with Chinese firms, allowing Western financial groups to tap into China’s vast pool of savings.
Fourth, China’s higher-yielding government debt market has become a relatively safe haven, underpinned by its low correlation with US Treasuries and China’s inclusion in global sovereign debt indices. Foreign investors now hold about 11 per cent of the stock of the nation’s bonds, further integrating Chinese assets into global capital markets.
These are clear signs that the economic and financial links between China and the West remain strong, and are too important – particularly for Western firms – to reverse. Just because the global economy and markets have so far proved resilient to China’s downturn does not mean decoupling is taking hold.
Nicholas Spiro is a partner at Lauressa Advisory
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This article originally appeared on the South China Morning Post (www.scmp.com), the leading news media reporting on China and Asia.
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