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China is no longer a source of stability

In the last four decades, we have come to appreciate China as a source of stability. It started with the advent of China as the global economy’s workplace, exporting disinflation and contributing to price stability on a low level. That phase is over now that the country is becoming more inward-looking.

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Key takeaways:

  • We downgraded Chinese offshore equities to Neutral in the wake of the government’s latest regulatory initiatives.
  • The eurozone has outpaced the US economy in the second quarter. Our economists see this strength as continuing throughout the year (see number of the week below).

The country turned into a cornerstone of asset allocation after the Great Financial Crisis, with steady and strong growth and the emergence of the Chinese technology giants. The latter are suffering from the Chinese government’s recent actions to reclaim control of consumer data.

The latest shock for Western investors is the demand for equality in the education sector. In the eyes of the government, education must be affordable for everybody and companies must not be profit-oriented – a move that has sent the shares of the formerly highly profitable education companies into a tailspin. The valuations are tempting, but our analysts have reduced the rating of Chinese offshore equities to Neutral as long as there is a lack of clarity as to the government’s next moves.

The momentum of the eurozone economy
China’s equity market might have lost some of its glamour, but new dynamism is to be found elsewhere. The eurozone economy has outgrown that of the US in the second quarter, and our economists have lifted their projection for the full year. Given the power of the German economy, the decline of the German government yield curve comes as an even bigger surprise. We can only see technical factors behind the latest move, in particular the heavy purchases of the European Central Bank. This is not a strategy that we rely on in the longer term, and we still prefer moderate credit risks given the momentum of the eurozone economy. The delta variant of the coronavirus cannot stop the eurozone economy, and neither will it slow the hunger for chips. We have definitively moved into a more integrated world, with ever-rising demand for semiconductors.

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