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Macroscope | Investors’ loss of confidence in China and UK economies will be hard to rebuild
- While country comparisons are often inapt, the intractable problems in China and Britain, and investors’ fearful response, merit scrutiny
- The response in both countries has been found wanting, and policymakers have their work cut out to restore confidence
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Cross-country comparisons are common but are often inapt and misleading. This is especially true when comparing advanced economies with emerging markets, given their different stages of development and political systems, as well as their varying levels of financial market maturity and liquidity.
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On occasion, however, common themes and trends emerge that merit scrutiny. Sentiment in financial markets can be fickle – particularly the way in which international investors perceive countries at a time of unprecedented uncertainty in the global economy. However, it can also reveal how effective policymakers are in managing financial and economic problems.
Although plenty of countries face severe challenges stemming from the dramatic rise in interest rates and the fast deceleration in growth, two countries are at the sharp end of the deterioration in sentiment. Among advanced economies, Britain has been in the doghouse for some time but has really become a basket case since the Bank of England (BOE) allowed inflation to become entrenched, exposing deep-seated problems that were exacerbated by the UK’s departure from the European Union.
In emerging markets, China’s faltering recovery has been the big disappointment this year, especially since the economy only reopened seven months ago following three years of self-imposed isolation. Instead of snapping back to life, it barely expanded in the second quarter compared with the first amid mounting concerns about the timeliness and effectiveness of government measures to stimulate growth.
To be sure, the UK and China face different economic challenges that require different policy responses. Moreover, China is less vulnerable to pressure from markets because of strict controls on its capital account and a state-owned financial system that makes a systemic crisis in the banking sector highly unlikely. Yet, both countries share a common problem: a loss of confidence on the part of investors that will be difficult to restore.
The similarities are eerie. While global stock markets have risen sharply this year – the technology-heavy Nasdaq Composite index is up a whopping 36 per cent – British and Chinese equities are struggling to remain in positive territory. The results of Bank of America’s latest global fund manager survey, published on July 18, revealed that shorting Chinese stocks was one of the most popular trades in markets while the UK was far and away the least attractive market globally among equity investors.
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