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Macroscope | China’s economy set to rebound as pandemic risks ease
- With inflation unlikely to constrain further policy easing, economic growth is set to recover gradually in the second half of 2022
- Chinese stocks are well positioned to continue to outperform equity markets in the rest of the world
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Despite being only halfway through the year, 2022 already seems set to be a remarkable one. Inflation in many developed-market economies is at multi-decade highs, while the S&P 500 had the worst start to the year in half a century.
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Amid the volatile market environment, the resilience of Chinese equities is notable. China’s benchmark CSI 300 Index has rallied about 10 per cent in the past month. It is one of the few major equity markets to have recorded a positive return in that period, outperforming both developed- and emerging-market equities.
Chinese equities look better positioned in the current global macro environment, given more favourable growth and policy cycles than the rest of the world. The core problem across developed economies is elevated inflation rates.
In the United States, for example, core consumer price inflation was running at 6 per cent year on year in May, well above the US Federal Reserve’s target of 2 per cent. Euro-zone inflation has also accelerated in recent months.
Central banks are tightening monetary policy in the face of these pressures. To successfully contain inflation, they must cool aggregate demand, which means a slower pace of growth. As a result, caution is warranted on the outlook for developed economies as they are likely to experience a period of sluggish growth.
In contrast, inflation is not a prevailing issue in China as core inflation remains below 1 per cent. As such, it is unlikely to constrain further policy easing. China’s economic growth is likely to recover in the second half of 2022, helped by strong policy support and the fading impact of the Covid-19 pandemic.
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