Amid Market Turmoil, Where’s China?
China’s economy is growing fast. But its capital markets still punch below their weight.
China is eroding American dominance in many arenas — just not the one that’s been fixating the world for the past week.
With global capital markets in turmoil, China has been largely absent from the conversation. Plenty of players are in the mix, from the Federal Reserve, to inflation, to volatility, to earnings, to stretched valuations. But China has been neither an overt contributor to the rout nor seen as an obvious solution. All eyes, for good or ill, have been on Wall Street.
It’s a timely counterpoint to the narrative that China is sweeping all before it. The notion that the U.S. has lost all influence, popular for a while and emphasized since Donald Trump’s election, was surely premature. Despite the enormous and growing size of China’s economy, its capital markets still punch well below their weight.
In terms of gross domestic product, China is second only to the U.S. and catching up fast. But the narrowing gap between the two isn’t yet reflected in the comparative influence of their capital markets on the global scene, nor in their ability to attract foreign investment. For the sake of stability, rebalancing here would be a good thing.
One result of this unipolar world (and perhaps partly a cause) is that the Fed is still the world’s central bank. If a principal theme of recent market angst has been the withdrawal of monetary stimulus, the Fed has led the pack. The European Central Bank, Bank of Canada, and Bank of England have taken steps in that direction, and at some point the Bank of Japan will follow.
Likewise, concern about stirring U.S. inflation, as shown in the Feb. 2 employment report, really puts the Fed at the center of the action. Most discussion about the People’s Bank of China recently hasn’t been about near-term policy. It’s been about the anticipated retirement of Governor Zhou Xiaochuan and who his successor may be.
Just to be clear, China’s ascendancy is reshaping the world — economic and otherwise — in ways big and small. In that, I’m a believer. And as with most aspects of life, China’s influence in capital markets will grow over time. Already, China is chipping away at American primacy in this domain.
Its bond market, the third largest, is instructive. In terms of foreign investment and access, the numbers are small. But they’re also growing. Trajectory may be more important than size. As my Bloomberg News colleague Emma Dai recently reported, China attracted $55 billion in foreign funds into bonds last year. That’s peanuts compared with $337 billion in foreign net purchases of U.S. Treasuries through November. But it’s also a 41 percent jump from 2016 — not peanuts.
Ultimately, the size and strength of an economy will be reflected in its markets. That suggests China will narrow the gap. Whether the bridge can fully be crossed may depend on harder stuff: a central bank approaching the Fed’s sway, predictability, and transparency, not to mention its independence. The last point may be the highest mountain to climb, perhaps too high for China’s leaders.
China’s clout in the global economy is growing, make no mistake. And there’s nothing particularly magical about economic policy in the U.S., where big mistakes can and have been made. But American markets remain in the lead, and for as long as the dollar is indisputably the world’s reserve currency, the U.S. still calls the tune. Whether the world is best served by a unipolar financial system is a different question.