Markets are having to get used to intensified rivalry between the great powers, broken supply chains and disruptions to global trade. Joe Biden, US president, has not succeeded in working closely with allies as promised, creating potholes on the roads to a post-Covid recovery and net zero carbon emissions. Given their elevated levels, markets are going to find it more difficult to adjust to these stresses.
China is becoming more assertive and nationalistic, extending its hold over many emerging market countries and their resources with alliances that challenge the West. This matters as it disrupts the global marketplace model and represents a new challenge to the progress of private sector investment. That — and Covid policies — have led to a series of interruptions to supply, extreme price gyrations in everything from timber and gas to shipping rates and iron ore, and a rush to build more capacity at home.
Xi Jinping, China’s president, has adopted more of chairman Mao’s mantle, emerging as the supreme ruler with no end date in sight for his rule. The new policy of “common prosperity for all” is intolerant of inequalities, hostile to successful entrepreneurs, entertainers and stars of social media and aims to nationalise more businesses or keep them heavily regulated by the state.
Xi has moved to strengthen his and the party’s control in many fields. The People’s Bank of China has Guo Shuqing as party secretary as well as a deputy governor of the bank. As a full member of the Communist Party Central Committee, Guo probably has more political clout than the governor. He is also the chief banking regulator. This double banking of command, common in China, is now more critical as the party increases its grip on behalf of the president.
The immediate challenge to markets comes with the attempts of the Chinese government to eliminate excesses from secondary banking and property. The failure of property developer Evergrande to meet interest payments on time on its massive $305bn debts has shaken market confidence.
So far markets seem to assume the Chinese authorities will not let the lessons being meted out to Evergrande create a system collapse. Guo made clear in a June 10 speech that they intended to put an end to all “loan like products” in the property and secondary banking markets. They are overhauling asset management products, rooting out Ponzi schemes, excessive leverage and dangerous use of derivatives.
We will see how it progresses by watching events. There is a shortage of guidance on how far they intend to go. With a declining population, greatly inflated house prices, with excessive debt levels in property companies and a new zeal against these excesses, we are in for headwinds to growth at best, as property is deflated. At worst, we face an uncomfortable series of bankruptcies and price falls. Property construction and rising values have been a disproportionate proportion of gross domestic product for many years.
In response to the pandemic, Guo went wider and attacked the US-led system of finance. He condemned the Fed for nearly doubling its balance sheet, the European Central Bank for increasing its commitments by 50 per cent and the Bank of Japan by one-quarter. Warning this would trigger inflation, he quipped that “as for how long it will last, it doesn’t seem that short”.
“When fiscal spending has been largely supported by money printing, it is like an airplane stuck in a spinning vortex. It would be very hard for the airplane to get out easily on its own,” he added.
China’s new five-year plan for 2021-25 does not forecast a five-year growth rate, and assumes slower growth while addressing the inequalities. China still has a positive interest rate, its central bank balance sheet is not ballooning, and it maintains controls over commercial bank lending to regulate debt.
It is worried that it has allowed too much private sector corporate debt and is now encouraging action from regulators, as well as bankruptcy, to rein it in. There may be fixes for domestic debt at the expense of shareholders and entrepreneurs, with a tougher approach to foreign debt.
This summer the Chinese economy has been slowed by policy, Covid measures, floods and more recently by widespread electricity rationing and power cuts. The monetary authorities are at last putting some liquidity into the system to prevent these varied problems doing more permanent damage.
As one permitted independent Chinese blogger has said, change is coming, markets will no longer be paradise for “get rich quick” capitalists, and instead of pursuing superficial changes the state needs to “scrape the poison from the bone”.
On the other side of the world, even the US Federal Reserve is now thinking of monetary tightening in response to higher inflation and runwaway energy prices. It is true that many of the price rises reflect temporary imbalances in supply and demand, but there are now rather a lot of them.
President Biden’s foreign policy and defence advisers see China as the main challenger and are ensuring no false signals are sent over Taiwan or over the US’s new-found zeal for protecting its own intellectual property and restoring national competence in crucial areas. In the EU, the inconclusive German election leaves a gap in leadership at a time when the demands of net zero and the problems of energy shortages hang over economies.
The FT portfolio is still geared to the global themes of “build back better”, with the bond and cash section assuming rate rises and more inflation to come. We have probably seen the best of the share market gains from the lows of March 2020 as we watch the main governments wrestle with how to end their vast array of special measures which so boosted assets. We continue to avoid investment in China ETFs as we await more news on how far its campaign of financial cleansing is going to go.
Sir John Redwood is chief global strategist for Charles Stanley. The FT Fund is a dummy portfolio intended to demonstrate how investors can use a wide range of ETFs to gain exposure to global stock markets while keeping down the costs of investing. [email protected]