With the most recent PMI data showing a jump in services to the neighbourhood of 64, she says the recovery in China so far has exceeded expectations. The fact that China is in a different stage of the economic and monetary policy cycle relative to the U.S. and Europe means it could offset a prospective Western recessionary trend – to a certain extent.
“This time around, Chinese demand is a little different from previous cycles,” Chen says. “I think this recovery is more driven by consumption or domestic services activity. It’s not driven by property market construction or infrastructure building, so the demand for commodities might be a little weaker than before.”
Because China’s economic engine will turn more on the piston of domestic consumption, it will likely not be as much of a beneficial partner for commodity exporters in the emerging-market world. On the other hand, Chen expects those that have been traditional destinations for Chinese tourism like Singapore, Thailand, and some European countries will probably see a revival in the services and consumption boost from returning vacationers.
“There’s also a secular trend of the U.S. reshoring and onshoring certain manufacturing activities. Some EM countries should benefit from this shift in supply chain,” she adds. “We’re already seeing this in the Mexican peso, which has been the best performer among EM currencies for the past year.”
If China does take off again, it won’t be an unburdened flight. Chen highlighted the amount of leverage in the country, with corporate debt representing at least 200% of GDP and a concerning rate of household debt growth. While household debt has eased more recently amid a rush of borrowers repaying their mortgage debts, Chinese policymakers will still be constrained in terms of hiking the country’s interest rate as they look to avoid overburdening corporations with steep borrowing costs.