Inflation shifts investor attention away from China slowdown, says economist

A generational surge in inflation in advanced economies is stealing the attention of investors from a generational slowdown in China that is arguable of much greater importance for the long-term global outlook, according to the Group Chief Economist at Capital Economics.

"We recently lowered our forecast for this year's officially reported GDP growth rate to 3 percent from 4 percent – the government's 5.5 percent target set in March has been quietly abandoned – but in reality don't expect the Chinese economy to grow at all," Neil Shearing said in a note.

"The conventional response in Beijing to such weakness would be to loosen policy. But the past week has again revealed the constraints under which policymakers in China are operating."

China's zero-Covid policy has hurt growth in recent months even as a slowing global economy weighs on demand for its exports. Central banks across the world are also tightening monetary policy at a sharp pace to curb red-hot inflation, further exacerbating growth woes.

Financial markets have whipsawed. The S&P 500 sank to the lowest since December 2020 overnight and the US Treasury yields continued to rise, with the 10-year rate climbing to the highest since April 2010.

After a decade-long run of giddying expansion, mounting evidence of bad economic news from China reflects a structural slowdown that's now in full train. Investors can be forgiven for having more immediate concerns on their mind, but they should be paying attention."

Amid a surge in the dollar, the People's Bank of China is trying to prevent the renminbi from going much beyond the seven-to-a-dollar level. The Chinese central bank on Monday hiked the reserve ratio for currency forwards, a move aimed at deterring speculation against the renminbi.

While there is nothing sacrosanct about the seven-to-a-dollar level, it is the line in the sand that policymakers appear to have drawn amid concerns that an overt weakening of the currency could encourage capital outflows, which would, in turn, destabilize the domestic financial system, Capital Economics said.