This week’s surprise rate cut from the PBOC has failed to draw market attention in the same way as a similar move some years ago might have done. 

Through to the start of the pandemic it seemed that strong Chinese growth was the engine room for the global economy while its very low inflation was simultaneously driving global disinflationary pressure. These factors had a bearing on global financial conditions. Not because China was (or is) big in terms of financial market clout, but more because its influence in driving global growth and disinflation helped lower global risk aversion and so drove strength in asset prices.

One consequence of this was that financial markets started to hang on every China data release in case the “magic” of strong growth and disinflation disappeared. Markets were also very sensitive to the threats that could upend China’s supporting role for the global economy. One of these being financial strains in many areas such as real estate.

But then came the pandemic. In fact, even before the pandemic there was a trade war with the US instigated by former president Trump (and maintained under Biden). Today, we find that developments in China appear to have almost no bearing on perceptions of the global economy and on its financial markets.

For example, even though China’s widely-anticipated post-lockdown economic bounce this year has failed to materialise, most forecasters like the IMF and OECD have still nudged global growth forecasts a bit higher. As for asset prices, such as stocks, the MSCI world index is up over 11% so far this year despite the fact that the CSI 300 in China is flat.

This week’s surprise rate cut from the PBOC has failed to draw market attention in the same way as a similar move some years ago might have done. We have also seen some of the defaults that investors seemed to fear, such as Evergrande in late-2021. But even here it seems that there have not been the global reverberations that many anticipated.

So why has China lost influence in this way? Mr. Steve Barrow, Head of Standard Bank G10 Strategy said there would be probably a number of factors. The first is that trade tensions arose during the Trump administration. The pandemic also bought with it increased distrust from many overseas governments along with the high-profile disruptions to supply chains. One consequence of this has been flatlining of Chinese exports after rapid growth. Another is that overseas inflows into China, both in terms of direct investment and portfolio investment have collapsed in the past year. There has also been a redirection of stimulus efforts in China away from the more traditional focus on investment in favour of the consumer, giving a sense that the country has become more inward looking in its efforts to stimulate activity. All these things point to the fact that China’s influence seems to have diminished.

But will it stay this way or is the influence still there, but just changed slightly? Mr. Steve Barrow thinks it could be a case of the latter. The China’s prior influence on global financial conditions came through its economic weight, not its importance in financial markets. If we compare it with the US, for instance, the US may have the same, or even less, influence in economic terms, but has a far greater role in financial terms as US rates and the dollar are key factors driving the global financial cycle. If China could compete financially with the US then its influence would rise again. But this seems unlikely.

What is more likely is that its influence continues to increase in certain regions, or among certain groups, such as the BRICS through, for instance, its desire to conduct bilateral trade via the renminbi, not the dollar. Hence, what we may find is that China’s influence continues to grow here even if it remains more modest in a global context, and particularly when it comes to developed economies and financial markets.