At the November meeting between President Xi and President Biden, the topics of discussion were eclectic, including fentanyl imports, military communications and the sending of pandas as envoys of friendships.
However, the details of the discussions were less important than the tacit admission from two of the most powerful countries in the world – that they need each other.
The meeting marked a notable departure from the inflammatory rhetoric that has characterised relations between the two countries over the past few years.
For investors, it may help shake the increasingly trenchant view that China is no place to invest. It may also help answer the question of whether Chinese markets could turn in the year ahead.
However, geopolitical tensions are only one of the factors that has weakened Chinese markets in the recent past.
While China’s well-publicised spat with the US has hurt a previously fruitful trading relationship – while also making investors nervous about whether their investments could be collateral damage – weak transparency, poor governance and government interference have also played a role.
Equally, investors might have overlooked all these factors had China repeated its exciting levels of pre-pandemic growth, but the Chinese economy has made a sluggish recovery from Covid-19.
More recently, it even tipped into deflation. Consumer prices fell 0.5 per cent in November, the steepest decline in three years, according to reports.
The country’s gross domestic product deflator – the broadest measure of prices – has now contracted for two consecutive quarters, according to a recent report in theFinancial Times.
Deflation eats into real wages, corporate earnings and raises the real value of any debt.
None of this would appear to suggest an immediate turnaround for the Chinese economy, but aside from the recent panda diplomacy there are two factors that could reverse its recent run of fortunes.
The first is the potential for a "big bazooka" stimulus package from the Chinese government.
Policymakers have been wary of large stimulus measures, believing it helped create the debt bubble in its property sector.
Overcoming reluctance
However, investors have started to become increasingly hopeful the Chinese government will overcome its reluctance and announce new measures in the face of weakening economic growth.
In her latest fund commentary, Rebecca Jiang, manager of the JPMorgan China Growth & Income Trust, says there are emerging signs of action: “Approximately two months ago, China announced the most significant of the various incremental easing measures it has undertaken this year, namely lowering the downpayment requirements on mortgages.
"Although it is still too early to see definitively how this pans out, the initial evidence is that there are some signs of a stabilisation in property sales."
She says economic data could start to improve from here. “The October purchasing managers’ index number came in below expectations, but it is likely that it was affected by the long holidays in the month.
