China’s Easing Forces Traders to Rethink How They Label Markets

The first country to get hit by the pandemic has become the first global economy to stumble as the world begins to heal, pushing investors to reconsider where China fits on the old-fashioned continuum of emerging and developed markets.

The world’s second-largest economy chose its own distinct path to recovery on Friday, lowering its reserve-requirement ratio and effectively easing monetary policy amid worries about the pace of its economic rebound. The move is a stark divergence from what’s happening in other parts of the world, where policy makers from Mexico to Brazil to Hungary have increased their key interest rates to deal with accelerating inflation. Even the Federal Reserve has hinted at taking a more hawkish monetary stance as prices rise.

“The global economy is pointing toward higher interest rates across the board. Longer-term rates in China look like they are heading the opposite way,” said Simon Harvey, a senior foreign-exchange market analyst at Monex in London. “China’s economy is transitioning.”

As the pandemic subsides, money managers are actively trying to assess where China stands as an investment. Strategists from BlackRock Inc., the the world’s biggest asset manager, said earlier this week that they’re counting the country as a separate investment destination, distinct from an emerging or a developed market.

China’s Easing Forces Traders to Rethink How They Label Markets

Chinese stocks make up more than a third of MSCI Inc.’s benchmark for emerging-market shares, and the yuan’s influence has been rising quickly in recent years. Chinese sovereign bonds will have the sixth-largest weighting in FTSE Russell’s flagship World Government Bond Index once the notes are phased in over the coming months.

The yuan advanced over the past year alongside 14 of the 24 emerging-market currencies tracked by Bloomberg, and a gauge of the dollar slipped. Meanwhile, the S&P 500 Index and a Bloomberg gauge of emerging-market shares excluding China have bolted higher in the past year as the Shanghai Shenzhen CSI 300 Index has barely budged.

Recovery Risk

The move by the People’s Bank of China is expected to unleash about 1 trillion yuan, or $154 billion, of long-term liquidity, underscoring the lingering fears about the pace of recovery. It also highlights the separate path China’s policymakers are taking as parts of the world gradually emerge from Covid-19 restrictions.

“If nothing else, it shows just how hard it is to fully recover from the pandemic,” said Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. in New York. “Will others follow? China is, I think, in a unique position, being the first to get hit by the pandemic and then the first to emerge.”

The move also could be a red flag for other economies that are just beginning to bounce back from the economic pain of Covid-19, according to Zhiwei Zhang, chief economist at Pinpoint Asset Management.

Regardless, the PBOC announcement sets up a new chapter for Chinese financial markets. And it helps explain why an enormous asset manager like BlackRock officially broke out the nation’s equities and government debt as standalone parts of its tactical views.

“We will soon get to a point where we won’t be discussing China as a nation with the emerging-market class,” Monex’s Harvey said. “There will be a point over the medium to long term that its monetary policy will start to resemble that of developed economies.”

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.