It's a twofer
A recovering U.S. and ‘modestly’ growing China are good for the EM and everyone.
All eyes are on China, where back-to-back meetings of its two major political bodies are about to wrap up. The so-called Two Sessions of the National People’s Congress and Chinese People’s Political Consultative Conference should offer a window into the thinking of Beijing’s priorities as the world begins to slowly emerge from the Covid crisis. With a new administration in Washington portending potentially smoother relations, even as it continues criticisms over human rights and intellectual property issues, President Xi Jinping and Communist Party leaders have approached recovery from this crisis far differently than they did from the global financial crisis a dozen years ago. Back then, China unleashed massive stimulus that not only jumpstarted its economy but also helped stabilize and lift all global markets.
This time, Beijing has been tapping the brakes while the rest of the world keeps going full throttle. Even before the Chinese New Year that began in early February, the Peoples Bank of China began tapering somewhat as part of a broader move to rein in credit. Because of its overall high debt-to-GDP ratio—and the unpleasant lessons learned following the financial crisis as excess liquidity found its way into property and other asset markets—the central bank is extremely mindful of asset price bubbles and financial stability risks. So, it’s draining liquidity from its economy while helicopters keep dropping money in the rest of the world. Its caution amid the global liquidity party has been a downer for investors—China’s equity market is down year-to-date after a stellar 2020—and has raised concerns about the potential impact on emerging markets.
Those worries arguably are misplaced. For one, China’s cautious approach to credit follows a year that, thanks to aggressive policies that isolated the Covid outbreak, saw its economy grow while the rest of the world’s shrank. Last week’s kickoff of the Two Sessions summit set a growth target of “more than 6%” for 2021—modest by China’s standards but still relatively robust. China exports surged nearly 61% in the year’s first two months and at home, anecdotal evidence suggests consumption rose sharply. Despite 75% capacity constraints, movie box offices set records for Chinese New Year and February, and Ministry of Commerce data showed restaurants and retail sales activity up 29% year-over-year during mid-February’s “Golden Week” and almost 5% from pandemic-free 2019. Major shippers China Postal Express and Cainiao reported shipments surged, with volume for the latter four times 2019 levels.
Combined with growth expectations in the U.S.—the OECD doubled its 2021 GDP forecast to 6.5% after Senate approval of President Biden’s $1.9 trillion package, and some Wall Street houses have growth projections at 7% and higher—the two largest global economies will be expanding in sync, with the biggest (the U.S.) at its fastest annual pace since at least 1984. All of this is excellent news for emerging and Pacific markets: Korean and Taiwanese tech exporters, Latin America commodity producers, Australian exporters, Association of Southeast Asian Nations exporters … all should do well. It won’t happen all at once. It’ll take time for the pandemic to fade. But with the world’s two largest consumer markets set to grow significantly, the Covid recovery party is bound to get larger. That China isn’t the only one setting the table doesn’t matter.