Questions about the strength of China’s post-lockdown rebound have become louder since the People’s Bank cut the required reserve ratio three weeks ago. But the trigger for this week’s sharp equity market sell-off was instead growing disquiet about the leadership’s commitment to open and free capital markets. The MSCI China index is now discounted relative to developed market equities to a degree that has not been seen since 2014/15, with the exception of a brief spell last year. Officials insist that it is only the private education sector that they want to crush but, even if investors accept that, the episode brings into focus the political risk associated with investing in China and it underlines the leadership’s ambivalence towards markets. We think this will take a toll on economic growth over the medium term. And we expect it to weigh further on equities too.
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