SUMMARY
While the markets appear content with the lack of a direct US-China conflict, recent geopolitical events will likely have long-term implications for the global economy. However, such risks are unlikely to change the direction of a Chinese economic recovery.
- Whether intended or not, US House Speaker Nancy Pelosi’s visit to Taiwan may have fundamentally changed the US-China-Taiwan relationship. It would become more difficult for the US and China to reach a common interpretation of the “One China policy”.
- China’s response is likely to be long term in nature and may gradually increase its control of water and airspace surrounding the island. Markets appear content with the lack of direct US-China conflict.
- After a brief recovery from the depths of lockdown, China’s economy lost momentum in July due to the mortgage boycotts, which may weigh on the progress of recovery in 3Q. Rising recession risks in the US may weigh further on external demand in 2023. Policymakers did not address these concerns at the July Politburo meeting.
- We continue to expect more policies to emerge to support the recovery. Indeed, some local remedies for the property market and a more flexible and selective COVID policy are being adopted to extend the recovery.
- We retain our constructive view of Chinese equities, because China remains the only major market in the world that is easing monetary and fiscal policy, seeing rising growth, and remain at attractive valuations.
- The policy delays and the geopolitical issues represent key risks, but likely do not change the direction of recovery. But we expect the recovery process to take longer and last well into 2023.
