While confidence in the US and Europe is likely to be knocked by the failure of banking group Silicon Valley Bank (SVB), growth in China is rebounding thanks to a nuanced approach to inflation and a willingness among corporates to invest. Richard Edgar met with Fidelity’s Steve Ellis, Global CIO for Fixed Income; Anna Stupnytska, Global Macro Economist; and Gita Bal, Global Head of Fixed Income Research, to assess recent financial sector events and balance these with positive developments in Asia. They were joined by Asia Economist Peiqian Liu, who offered an on-the-ground assessment of China's recovery.
The collapse of SVB, the most significant banking failure in the US since the global financial crisis, coupled with the concerns about the health of fellow US lender First Republic, have set alarm bells ringing. In response, the US Federal Reserve (Fed) acted quickly by introducing a new facility called the Bank Term Funding Programme (BTFP), which can provide emergency support to distressed depositary institutions. We have also seen 11 leading US banks join forces to announce a US$30 billion rescue package for First Republic. Meanwhile, the Swiss authorities sought to underpin market stability in Europe by overseeing the merger of struggling banking giant Credit Suisse with UBS.
Yet however loud these alarm bells, it is worth remembering that context is an investor’s strongest ally. The backdrop suggests that systemic risk is largely absent in today’s banking system. Specifically, Fidelity’s analysts support this belief by highlighting company-specific issues, such as the mismatch between SVB’s asset-liability management and its broader business operations.
“The circumstances around SVB are unique,” confirms Bal. She explains that worrying headlines mask the fact that global businesses are broadly upbeat. “2023 is delivering meaningful improvements in management sentiment that are, on aggregate, taking it into positive territory,” she says; a point underlined by the results of last year’s Fidelity Analyst Survey Light at the End of the Tunnel.
Bal continues by noting that Fidelity’s analysts find that company management teams have become less upbeat in the US. As such, our leading indicators there remain negative. The downbeat tone may be influenced by recent concerns about the banking sector but also worries about how inflation is affecting margins – especially in relation to rising labour costs.
Optimistic, pro-growth agenda
Beyond the US, analyst feedback also tells us that sentiment in Asia is mainly bullish thanks to China’s reopening and government messaging that supports a pragmatic pro-growth agenda. It should be no surprise that Bal describes Fidelity’s analysts in China as being “particularly optimistic.” Liu continues by noting that “the general belief is that business activity in China is improving, and there is a noticeable increase in consumption, particularly in Beijing.” Indeed, during a recent research trip to China, she discovered that sentiment was far more positive than anticipated.
In tandem, concerns about the regulatory changes introduced in 2021 and, more recently, COVID-related restrictions are quickly receding. “The business community is looking forward to a new start and discussing how it can revitalise the economy on a stronger footing,” says Liu.
Modest but solid expansion
With a growth target of around five per cent this year, there will be a greater focus on domestically driven growth in China. Liu thinks the country’s recovery will be stable albeit modest compared to pre-pandemic rates of expansion that averaged 9 per cent annually over three decades.
In turn, this will feed through to global growth – although to a lesser extent than the commodity-driven boom of the early 2010s. It is further expected that recovery will be encouraged by consumption and, to some extent, manufacturing investment, with a more restrained uptick in the property sector.
An upturn in core inflation
Turning to inflation, China’s headline Consumer Price Index (CPI) target remains at three per cent2. This goal reflects a more nuanced approach towards price pressures. “While we can expect a rebound in core inflation as consumption and services recover, we are also likely to witness a decrease in energy and food prices, which will support a more moderate rebound in headline inflation,” explains Liu.
Recovery in the services sector
However, the picture is more layered when we judge whether China will export inflationary pressures. On one hand, the transmission of China’s Producer Price Index (PPI) to global manufacturing products will continue to reflect a deflationary trend. This is in stark contrast to the supply shortages of 2021 and 2022. Conversely, Liu warns that a consumer-driven recovery in China echoed in the outbound flows of services, such as tourism, and growing demand for goods and services manufactured overseas, may drive up services-related inflation.
“This could result in idiosyncratic inflationary pressures in some regions due to China’s reopening,” she continues.
The business mood turns positive
Although some of the improvements in economic indicators observed in Europe, for instance, could be related to China’s recovery, there is a feeling that the reopening impact will be felt most strongly closer to home. “We don’t think that China's recovery will spur rapid growth in other territories, such as Emerging Asia,” says Stupnytska, “But the outlook is certainly positive.”
These points emphasise the fact that events like the collapse of SVB or the takeover of Credit Suisse are likely to knock short-to medium-term investor confidence. Still, it is vital to remember that China is following a different path. It is maintaining a more nuanced approach to inflation, and reopening is likely to drive growth domestically and across Asia.
For additional information on the concepts raised in this article. Please visit:
