There is Something Rotten in China

May 22, 2023
By Steven Vannelli, CFA in Economy, Markets

One metric I look at fairly often for various countries is the relationship between the performance of stocks vs. bonds. The idea is straightforward enough: when stocks are outperforming bonds, it tends to be associated with a growing economy. When bonds are outperforming stocks, it is a tell that there is some sort of negative dynamic going on.

Why do I bring this up? In the US, stocks—represented by the SPY ETF—have just made a new high relative to the TLT ETF (which represents long-term US Treasury bonds). This would suggest that despite all the angst over inflation, the debt ceiling, and other issues, investors seem to taking a positive perspective.

This contrasts with China. In China, stocks have underperformed government bonds by about 50% since the beginning of 2021. This suggests there could be something rotten going on underneath the surface of the Chinese economy. Debt issues, housing issues, demographic issues, and geopolitical issues all could be weighing on sentiment toward Chinese equities and growth.

To further validate the theory that there is something rotten in China, I overlay the CNY/USD on the stock/bond chart. The CNY is weakening alongside this relationship of bonds outperforming stocks.

While last fall, the market began to discount the opening of China, now the dynamic seems to have changed. Copper did a good job signaling the upturn in Chinese GDP estimates for 2023. With the Chinese reopening seeming to have less thrust than was anticipated, copper prices are falling again. This could telegraph a downturn in Chinese growth estimates.


As of 3/31/23, the iShares 20+ Year US Treasury Bond ETF was held in the Knowledge Leaders Strategy.

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