While the rise in consumer prices in the West continues to occupy our leaders in China, the possibility of entry into deflation worries. The Chinese recovery is not as strong as expected, particularly on the domestic demand front.
As a result, Chinese companies need help raising their prices. At the same time, supply chain problems that have long affected China have primarily disappeared, resulting in lower price pressure. Overall, annual inflation was no longer above 0.1% in April, while producer prices significantly declined since April 2020 (-3.6%).
If it does not yet affect the final consumer, such a level of deflation will undoubtedly worry the Beijing authorities and encourage them to act quickly because it shows that, after a relatively dynamic first quarter, the Chinese economy is slow to consolidate the recovery. They will act all the more easily if they have much leeway.
Meagre inflation allows the Chinese Central Bank to lower its key interest rates. At 3.65% since the summer of 2022, they could be reduced in the coming months to make credit cheaper and thus boost consumption and investment.
At the same time, with substantial foreign exchange reserves of some USD 3205 billion (around €2920 billion), China could afford a fiscal stimulus worthy of the name.
Therefore, if the Chinese recovery is disappointing, there is little doubt that Beijing has many levers to revive it. The authorities will use some of them in the coming months. Therefore, they will do what it takes to reach their growth targets over 2023 because a second failure (after that of 2022) would be difficult to digest and would blow President Xi Jinping’s credibility.
The country will therefore be more dynamic than most other major economies over the year. With the 10-year rate still at 2.7% while inflation is close to zero, the Chinese government bond offers an exciting yield at this stage.
It is, therefore, present in our portfolio significantly since the expected fall in interest rates will increase the prices of existing bonds.
As for Chinese equities, they are present in our portfolio as a diversification.
Money Framework
Euroconsumers Invest returns its Money Framework in May to help investors define the "ecosystem" of money and customise the steps for their future well-being, whether at the beginning of a career or to reassess their current situation