Finally, some time to breathe. After three weeks of absolute madness in financial markets, quietness has been restored. No banking problems, no Central Bank decisions, no surprisingly worrisome economic data. These last 5 days were so relaxed that I didn’t even know what I should be talking about in this fourth edition of the Week at the Close.
What I knew was that I didn’t want to overfocus again on what was happening on the other side of the Atlantic – hence no US for this week. If you want to go on a quick financial trip to Asia, without worrying too much about our American friends’ problems or our own issues in Europe (which are also non-negligible despite the current apparent improvements) just sit back a bit and follow me.
Since the very beginning of the year, a prevailing sentiment was surging: something was about to change in the market. The reason? The world’s second-biggest economy. China would re-enter the economic playfield in full force after three years of unusual policies and developments. Take your pick: zero-covid policies, disputes between the government and the private sector, problems in the property market, regulatory repression on the platform economy.
A lot of sectors of the Chinese economy were being affected, and all at once. As things were appearing to alleviate – after the completely abrupt end of the zero-covid policies in December – the market got excited about the China story. Stronger world growth would emerge, and disinflation forces would appear to ease the current biggest western world problem, as a consequence of the relief introduced in the majority of supply chains that are too deeply dependent on Asian countries.
However, at the beginning of the month (which feels like an eternity ago), the Chinese government set a growth target of a modest 5% – lower than what market participants were expecting, given the lower base from 2022. Not good news, after an also disappointing year before.
The fact is that, over the last few years, policy in China has somewhat changed. The government’s focus shifted from making the country become a world growth powerhouse to consolidating its inward-looking agenda.
One of the clearest examples of this was the troubled relationship between the government authorities and one of the country’s biggest companies: Alibaba.
The sudden jump to the sidelines of the noticeable founder of the company, Jack Ma, after a speech that wasn’t well digested by the government, took Alibaba into a conflict with policy-makers and regulators. The result was a total of more than 2,5 billion euros in fines. In market values, the impact was even more eye-popping: from a market cap of around 800 billion, the company is now worth around 200.
During this week, however, the company came back to the newspaper’s cover pages. Not only did Jack Ma appear publicly in China, which is now considered a rare event, but also the company itself announced plans to split into 6 (!) different business units, with an important detail: each of which will have independence in accessing fundraising and possibly, and also more remarkably, will have the ability to go through its own IPO.
The benefits are tangible: incentivizing these capital markets operations, which have been in sleepy mode during the last few years, may bring investors back, and attract them to re-start participating in financial operations. As investors’ attention and, more importantly, their capital come back to Beijing, the faster China will achieve its rebound prospects.
How much of these developments were influenced by the government is still unknown. But unequivocally, we can feel in the air some will from the Chinese authorities to change something in terms of perceptions related to economic conditions in the country. Given these years of unusually tight conditions, especially for entrepreneurship and business establishment, Beijing would definitely welcome a rebound in confidence from these groups, which would certainly help in achieving the 5% target announced by the government.
But keep your eyes open. Insofar, the re-surging of China has been associated, as I noted before, with downward pressures on the price dynamics that the western world is battling, and this actually seems to have happened. However, the risk remains that growth in the country may eventually start adding further pressure to the demand side of the equation. This may be especially felt in the commodity realm. As this translates into our economy, if it does, we’ll have an even harder fight against the current public enemy number 1: inflation.