How China will recover even while developed markets flounder

ON JUL 27, the US Federal Reserve made clear its intent to rein in runaway inflation by hiking its benchmark interest rate by a further three-quarters of a percentage point.

While this hike was largely in line with market expectations, it still stoked fear of a looming US recession as it would exacerbate capital outflows in emerging markets. The impact of the hike will, however, be moderate on China, which is recovering from the fallout of the Covid-19 pandemic.

China’s cyclical growth and macro policy trajectories look increasingly divergent from developed markets (DM). Such divergence is likely to narrow the current growth differential between these 2 economic blocs, with implications on company earnings and interest rate differentials.