I am increasingly convinced that China’s economy has bottomed. This is very positive in the long term for global markets.
But let’s back up. How did we get here, to a place where China’s economy has so diverged from the rest of the world?
What Happened to the Chinese Economy?
It all goes back to Covid-19 and the Chinese government’s response. As public health lockdowns cut Chinese economic growth, sharp reductions in consumer spending and global supply chains led to severe economic strain against the very high debt load that China carries. That, combined with geopolitical tensions and an ongoing U.S.-China trade war, made it even harder for the Chinese economy to recover.
But we are now four years into this. And the People’s Bank of China is finally starting to respond.
One of their main roles as the central bank is to manage liquidity, similar to the Federal Reserve within the U.S. To that end, the PBoC is now considering adding Treasury bond trading to its toolkit through the secondary market. Why does this matter? It gives the central bank more flexibility to respond to short-term strains. Transacting on the secondary bond market helps China to inject capital to stabilize liquidity, improve policy transmission efficiency and support the real economy. The new channel for capital injection to the financial market is expected to enhance financial market stability and improve the proportion of capital supplied to support the real economy, in turn improving economic growth.
Measures by the PBoC to support the economy and moderate liquidity have far-reaching importance for the future direction of China’s economy.
They are designed not simply to stop the economy from sliding but, rather, to build the foundations for creating a new normal in which growth is steadily sustained. The preemptive measures stand in contrast to many of the reactive steps taken in the past by China, and more aligns their activism to what the Fed has done when it comes to the U.S.
The Bottom Line on the PBoC and Its Next Steps
So, has China bottomed? I think so.
Are China’s markets becoming increasingly more attractive for traders? Yes, I think so.
As a contrarian, I am bullish that China could be a big winner in the latter half of 2024. Just stay on the lookout for a global volatility crisis that could take everything down.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
