But the level of business activity has declined substantially, with only $1.7bn of IPOs in Hong Kong in the first quarter, a 90 per cent decline year on year. This is is partly due to restrictions on overseas listings and the nervous state of markets due to current economic conditions as well as the war in Ukraine. The two month lockdown in Shanghai and the rolling lockdown in Beijing is stifling economic growth. It is likely that the economy will contract in the second quarter. In addtion, Chinese consumers are not spending in the way they did in the first lockdown.
Measures to stimulate the economy include reducing reserve requirements at banks, which means reducing how large the reserves the bank need to hold against specific types of economic activity. With lower reserve requirements, banks can increase their lending. Other measures included infrastructure spending. However, increased lending and infrastructure spending doesn’t work if businesses do not need to invest and infrastructure is already well invested in China. The former will see investment into bad businesses which will encourage bad loans to grow and the latter type of investment will likely see low value infrastructure that won’t meaningfully increase the country’s productivity.
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Xi Xinping will face the largely rubber stamp central committee of the communist party meeting in the Autumn at which he aims to be appointed leader for life. He will point to the relative success of the communist party’s approach versus the approach of the West and its far higher
death rates. However, the risk is that with a difficult economy there will be unrest, or, to be precise, more unrest than there is currently. We do not believe his appointment to be in jeopardy, but predicting global events recently has been unreliable. What is more concerning is the effect a slowing Chinese economy could have on global growth given that Chinese growth accounts for 20% of global GDP growth from now until 2026. With consumer confidence at low levels, shipping facing huge delays and factory output at low levels, China’s problem could become the world’s problem.
Turkey currency collapse
The Turkish Lira has endured multiple currency crisis in recent years, but what makes the current crisis unique is that it is not caused by the country’s economic fundamentals as it has in the past, but almost entirely by the actions of its president, Recep Tayyip Erodgan. The Lira dropped by almost 50% against the dollar in 2021 and so far shows no sign of a recovery in 2022. The problems started when Erodgan fired well-respected central bank chief Naci Agbal in early 2021 and replaced him with party loyalist Sahap Kavcioglu. This action alone led to the lira dropping by 15%, although it recovered somewhat in the following weeks before 500 basis points of rate cuts in late 2021 saw the currency plummet. Erdogan is convinced that cutting interest rates will boost exports and generate high economic growth ahead of the general election next year and declared himself the ‘enemy of interest rates’.
