Market turned towards China, yuan no reaction to Fitch's decision

The day when financial markets are anxiously awaiting the CPI inflation reading from the US began with 'flashes' directed towards China. The rating agency Fitch Ratings today lowered the outlook for the Chinese economy to negative, leaving the rating unchanged at A+. However, Chinese assets did not react with sales, and there is no trace of the panic today.

Hang Seng index increase

Moreover, the box office session in both mainland China and Hong Kong was marked by a clear advantage of buyers. Hang Seng Index increased by nearly 1,75%. Why this reaction and why is the mood in China improving? In fact, the Fitch report didn't say anything that the market hasn't already known. The report mentions: China's growing debt problem (still small compared to the scale it took on in the USA) and vague prospects for maintaining dynamic GDP growth in the coming years. On the other hand, as the agency itself admitted, the risk associated with public debt is mitigated by a high savings rate.

The report also has another bright side that the market seems to be consuming. Well Fitch does not expect deflation to take root in the Chinese economy. According to Fitch estimates, China's GDP growth will slow down to 4,5% in 2024 from 5,2% in 2023. In turn, the inflation forecast was set at 0,7% at the end of 2024 and 1,3% at the end 2025. Industrial production and retail sales in China exceeded forecasts in January-February, and the market seems to be sure that China, contrary to gloomy forecasts, will not face an immediate economic disaster. We can also see this in the recent reactions on the copper market, where, apart from the raw material itself, we are seeing a surge in global shares of raw material producers; on the Polish stock exchange, visible in the KGHM quotations.

Waiting for inflation data from the USA

It seems that this does not have to be the last such decision of the rating agency this year. In December, Moody's warned of a possible downgrade of China's credit rating. She then cited the costs of rescuing local governments and state-owned companies, while controlling the real estate crisis. However, it seems that the financial market has already priced in the short-term consequences of China's economic problems "long ago", and the rating giants are, as usual, "late". However, this does not change the fact that long-term risks for China remain visible; even more so if we look at forecasts that the population will shrink by approximately 1 billion by 2100. How will this affect the Chinese pension system? Fitch forecasts China's overall government deficit will rise to 7,1% of GDP in 2024, a record from 8,6% in 2020. The debt of the general government sector will increase to 61,3% of GDP in 2024 compared to 38,5% in 2019. The Fitch report also shows that the risk of a growing spiral of government debt applies not only to the United States, but also to the world's second largest economy.

The currency market is relatively muted today ahead of the reading CPI from the USA, which we will meet in the early afternoon. The market expects a reading of 3,7% compared to 3,8% previously. A higher-than-expected reading would probably shift expectations of policy easing to autumn this year in the short term, it strengthened the dollar and yields. But whether such a move would strengthen the Greenback in the long term will probably only be shown by the data coming in in the coming months. The market is aware that the longer high real rates are maintained, the more stress accumulates in the economy. There is some consolation in the fact that private debt in the US economy has declined from 2008 levels and remains relatively low. Perhaps that's why we haven't seen any major cracks yet, beyond the regional lender crisis.

Today we pay 3,92 for the US dollar, 4,26 for the euro, 4,35 for the Swiss franc and 4,98 for the pound sterling.

Source: Eryk Szmyd, XTB