Global growth and the credit cycle in China
Bond markets began 2021 gripped by a ‘reflation’ narrative: COVID vaccines and imminent economic reopening would add powerful tailwinds to fiscal stimulus and continuing extraordinary monetary policy support. However, this optimism was short-lived. Subsequent flattening of global bond yield curves reflects an emerging counter-narrative in fixed income markets: that global growth is likely to slow quickly into year-end.
That said, fiscal policy across G7 economies is likely to remain supportive until employment has recovered to pre-covid levels, while expectations for interest rate hikes remain modest. Therefore, we conclude that there must be other dominant factors driving market sentiment. We discuss the importance of the China credit cycle and its likely influence upon global growth.