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It is nothing short of amazing that the S&P 500 is up nearly 8% year-to-date and the US economic recovery remains on track. But as encouraging as that rebound seems, it may not be the most important driver of global capital markets going forward. Instead, Lisa Shalett from Morgan Stanley points to the speed and durability of China’s economic turnaround.

Key quotes

“China’s economic balance continues to improve as domestic consumer and business demand makes up a greater percentage of spending. The country is less dependent on exports, which are now only 17% of GDP, down from 35% in 2007. We see room for more growth as per capita disposable income and consumption spending return to their long-term growth trend, after a vaccine is available. Vacation-related spending is still off by close to 60% currently in China.”

“China appears to have ample fiscal and monetary policy flexibility, unlike most central banks and sovereign governments around the world. It didn’t have to resort to bond buying, balance-sheet expansion or historically unprecedented levels of government spending this year. While the US, Europe and Japan pursued policies that saw combined fiscal and monetary stimulus move toward 30% of GDP, China’s policy expenditures have been about 6% of GDP so far.”

“China’s interest rate and currency dynamics remain attractive, suggesting a healthy backdrop for attracting foreign capital flows and protecting investor capital gains. China 10-year bonds are yielding nearly 3.2%, the widest premium in 15 years to the US 10-year Treasury, which yields less than 1%. For its part, the yuan, which China’s central bank generally keeps within a targeted range, is now at the strongest level since 2018, trading at 6.65 to the dollar. Such metrics point to the ongoing internationalization of the renminbi. Morgan Stanley & Co. strategists estimate that 10% of global reserves could be held in China’s currency by 2030.”