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China's slump concerns persist despite global stock market rally

China's slump concerns persist despite global stock market rally

China's unceasing economic malaise threatens to ripple across rallying global markets, according to the latest Bloomberg Markets Live Pulse survey.

Global stocks are at records as US economic resilience, buzz around artificial intelligence and growth in places like India and Indonesia keep the rally going. That's despite troubles in the world's second-largest economy that include property-sector turmoil, entrenched deflation and geopolitical tensions with the US.

About three-quarters of 238 MLIV Pulse respondents are somewhat or very concerned about the country's problems spilling into other major economies this year. This underscores the concerns among global investors that China's economic troubles and absence of effective policy response will hit global investment and consumption cycles.

"This is a huge economy that is slowing down," said Redmond Wong, market strategist for Saxo Capital Markets HK Ltd. "Slower growth in China is a risk to the global economy,"

China's size and influence with other economies simply makes it difficult to ignore. Dong Chen, chief Asia strategist and head of Asia research for Pictet Wealth Management, warned that the country might export its deflation to the rest of the world. He cited areas like solar panels and electric vehicles where Chinese companies are slashing prices and said that may affect the industries globally.

It would be the same in reverse, too.

"Any company in the region exporting to China toward areas that are soft in the economy will be affected," said Xin-Yao Ng, an investment director at abrdn.

This elevated concern about risks of contagion from China's troubles comes while country's benchmark CSI 300 index is rebounding from three years of declines. A rally over the past month, likely with some help from the so-called national team, has sparked debate about whether the floor is in for the country's stocks - but opinions are still divided. The MLIV Pulse survey shows about an equal number of investors planning to increase and decrease their exposure to the country over the next 12 months.

"The structural and cyclical problems facing the economy are still holding long-term global allocation money from adding positions on China," said Daisy Li, fund manager at EFG Asset Management HK Ltd. "Heightened geopolitical tensions in a US election year" and "the absence of 'Big Bang' stimulus" will likely keep global capital at bay, she added.

While President Xi Jinping's government is seeking to break China's cycle of debt-driven growth and sustainably expand the economy, his 5% growth target and measures such as an issuance plan for ultra-long government bonds announced last week during the National People's Congress failed to assuage international investors. Instead, more than half of the MLIV Pulse survey participants expect the meeting will be seen as largely irrelevant within a month.

However, the views differ strongly, depending on whether respondents are planning to grow or cut their exposure to the country over the next year.

"People were disappointed that the Congress didn't address in any depth the housing or local government debt issues," Wong said. "I don't see any catalyst for a turn in the market to spark a big bull run until we see some fundamental change."

Additionally, many respondents see China stock market as likely to fall into an extended slump resembling the one that dogged Japan for decades beginning in the 1990s, when policymakers sought to rein in a credit bubble based on vastly inflated real-estate values and the financial system tumbled into crisis, roiling the equity market for decades.

Without big policy catalysts, the stock market looks set for a choppy path. Morgan Stanley expects volatility to rise as the nation's weaker-than-expected fiscal budget bodes ill for corporate earnings and major inflows are likely to be capped in the near-term due to ongoing macro uncertainty and the lagging effect of US yields peaking.

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