Heading into the year, many investors were bullish on Chinese stocks because the government seemed to be winding down its “zero-COVID” policies from 2022, which included widescale lockdowns.
This set up a good backdrop for an economic rebound and in the first quarter of the year, China grew its economy by 4.5% in Q1, below its 5% annual target, but progress to be sure. Since then, economic data has been mixed and investors are not sure the recovery can sustain the momentum.
But billionaire Ken Griffin, who founded the $54 billion asset hedge fund Citadel, is more optimistic about China and actually thinks China’s potential success this year could help the U.S. economy as well. Here’s why.
The fate of China and the U.S. are intertwined
Most Chinese stock indexes so far this year are flat or in the red as the sector has not bounced back as many had hoped. While there has been some promising economic data in the country, there are also some concerns such as high youth unemployment, a slowdown in factory activity, a struggling real estate market, and geopolitical tensions with the U.S. that has led investors to sour on China’s economic recovery and Chinese stocks as a whole.
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“My economists think China’s GDP (gross domestic product) growth may be better than expected this year, and I hope they’re right,” Griffin recently told the Financial Times. “That would go a long way toward helping the US achieve a soft landing. If China hits a speed bump as US consumer spending stops, that would be a really ugly one-two punch.”
Griffin added that, along with the U.S., China is a critical global destination for investors and for innovation because a lot of what happens in the country will impact change on a global scale.
“Every country is its own story — for example, in Japan the story is improving corporate governance and focusing on shareholder returns. In China, the story is the unbelievable size the market has become, combined with innovation that create opportunities,” he said.
Another reason Griffin views China’s performance as being critical to the U.S. economy is that inflation in the U.S. could remain sticky. While Griffin acknowledges that inflation is falling, the 53-year-old also thinks it could be tough for policymakers to get inflation all the way back to the Federal Reserve’s preferred 2% target.
Griffin believes China could have a better year than expected because the Chinese government is starting to once again promote economic growth.
We saw that earlier this week when China’s central bank, the People’s Bank of China, surprisingly cut its seven-day reverse repo rate from 2% to 1.9%. This has led investors and analysts to believe that further rate hikes could be coming later this year, which will promote lending activity. Investors and analysts also seem to think that the Chinese government will soon introduce an economic stimulus package that could get the economy moving, particularly in the property sector, which has now been struggling for years.
Waiting for clarity
Similar to in the U.S., it’s hard to tell how things in China will play out the rest of the year. Just like all of the Federal Reserve’s interest rate hikes will take time to work their way through the U.S. economy, a recovery in China could take time as well and not materialize for some time.
There’s also no guarantee that the Chinese government will be able to provide enough stimulus to really make a difference because the country already has a lot of debt, which makes stimulus measures harder to do. But given Griffin’s success, with Citadel’s main hedge fund generating returns of 38% in 2022, his opinions certainly hold water and it’s also interesting to hear how critical he thinks China’s success is to the U.S.