Re-opening of global economies and borders will be an inevitable step after governments around the world went about the business of vaccinating their people on an urgent basis. We should therefore expect the global economic activity to grow in a more sustainable manner going forward. The higher inflation that most developed economies are seeing is also not unexpected. We think the inflation is likely to be transitory rather than persistent, judging by recent released numbers. However, the lingering supply chain bottlenecks may still keep some portions of inflation pressure higher for a bit longer as these issues work their way through next year.
In US, the Federal Reserve has signalled that it will likely begin tapering if the US economy remains strong. Taking the cue from their latest announcements, it would likely end its bond purchase program by mid-June 2022. It has also set conditions before any lift-off in interest rates were to take place.
There is little doubt that China’s economy has lost a bit of momentum recently. Industrial production growth slowed in August, and Fixed Asset Investment growth has barely increased. Retail sales has also been expanding at a slower pace. To us, we are not too perturbed by these weaker showing. This is because the fundamental drivers of the economy are still in decent shape, and some of the slowdown is policy-induced and could be dialled back pretty quickly by policymakers if they pose a real threat to a big economic slowdown.
Following on from our discussion on the Evergrande event, we believe the market’s concern on contagion risk on the Chinese financial system is overstated. Firstly, the size of the company’s total borrowings constitutes about 40 basis points of total credit in China. Secondly, the People’s Bank of China has been actively injecting money through the short-term repo market in ensuring the financial system has sufficient liquidity to prevent clogging. The short-term repo rates have continued to be steady and low during this period, meaning systemic risk in this respect is minimal. We shall continue to monitor the developments in the Chinese property sector with respect to the housing demand and house prices, to assess whether the latest Evergrande situation will indeed pose a bigger macro risk in future.
On the recent Chinese regulatory tightening measures, there are signs that we could have seen the peak of the tightening phase. There appears to be a greater desire by the government to engage in more regular and deliberate communication with the market players. Furthermore, new regulatory announcements seemed to have tapered in recent times, suggesting that we could be moving to the implementation phase. Lastly, management teams of listed companies have also begun to comment on how the announced measures would affect the companies’ performances. These developments have allowed market participants to have a stronger handle on companies’ long-term earnings growth.
In summary, we are in the middle of adjusting in a new phase of the economy; characterized by slower growth and uneven expansion in different parts of the world. This growth while uneven, has been affected by various choking points like supply chain disruption and government policies. Our initial assessment on these choking points are probably road bumps and temporary in nature. The bigger picture is that global economic growth would be more sustainable after the borders reopen, and the markets work through these adverse issues.