The world has been transfixed by the horrific war in Ukraine, but this isn’t the only challenge facing the global economy right now. Most investment analysts consider <a href="https://www.thenationalnews.com/business/economy/2022/04/20/governments-need-agile-fiscal-policies-amid-high-debt-inflation-and-commodity-prices/" target="_blank">inflation a much bigger threat</a>, as it is forcing central bankers to tighten stimulus and increase interest rates, even at the risk of triggering a recession. The US Federal Reserve has just agreed its <a href="https://www.thenationalnews.com/business/economy/2022/05/04/us-federal-reserve-raises-interest-rates-by-50-basis-points/" target="_blank">biggest interest rate increase since May 2000</a>, lifting the fed funds rate by 0.5 per cent, to a range of 0.75 per cent to 1 per cent. The <a href="https://www.thenationalnews.com/Business/UK/2022/05/05/bank-of-england-raises-interest-rates-to-1/" target="_blank">Bank of England has now raised interest rates four times</a> since December, lifting the base rate to 1 per cent. As inflation rockets towards 10 per cent, there are many more rate increases to come. If the EU agrees to a <a href="https://www.thenationalnews.com/business/energy/2022/05/03/oil-prices-hover-above-100-as-eu-plans-sanctions-on-russias-energy-exports/" target="_blank">comprehensive embargo of Russian oil and gas imports</a>, as seems increasingly likely, that will only add to inflationary pressures. Yet there is a third worry, one that has attracted much less attention. While many countries are shrugging off the Covid-19 pandemic, it is still <a href="https://www.thenationalnews.com/coronavirus/2022/04/23/china-sounds-alert-over-beijing-covid-19-cases-as-shanghai-reports-more-deaths/" target="_blank">an issue in China</a>, where authorities are battling to suppress Omicron variants. With up to 300 new cases a day from the pandemic in Hong Kong, the mainland has responded by introducing strict lockdowns as part of its “dynamic <a href="https://www.thenationalnews.com/coronavirus/2022/03/01/top-chinese-scientist-predicts-easing-of-zero-covid-policy-on-horizon/" target="_blank">zero-Covid policy</a>”. Inevitably, these are squeezing economic activity, particularly in the major manufacturing and property sectors. Shanghai is now closed, along with Beijing's Chaoyang district, where three rounds of mass testing for 3.5 million residents has been held. China is now the world’s second-biggest economy, valued at $17.7 trillion in 2021. It is also one of the fastest-growing economies in the world, with gross domestic product (GDP) rising by 8.1 per cent last year, according to the National Bureau of Statistics. If its economy slows, so does the global economy. We are already seeing the effect in <a href="https://www.thenationalnews.com/business/economy/2022/04/26/food-and-energy-prices-to-stay-at-historically-high-levels-until-2024-world-bank-says/" target="_blank">commodity prices </a>as China is the world’s biggest consumer of metals and minerals. Many investors use the copper price to gauge the temperature of the global economy — hence its name Dr Copper — and the symptoms look alarming right now. The copper price has crashed to $4.28 from $4.80 a pound since April 16, a drop of more than 10 per cent. When copper sells off, it is usually a bad sign, Fawad Razaqzada, market analyst at City Index and Forex, says. “China is the world’s largest net importer of copper and this particular sell-off is undoubtedly because of the latest lockdowns there,” he adds. The Chinese yuan has also fallen, as have the currencies of commodity-producing countries such as Australia and Canada, which depend on Chinese demand. “Chinese equities have dropped, with European and US futures also feeling the pain. Crude oil, copper and other metals all fell on demand concerns,” Mr Razaqzada says. China is still targeting GDP growth of 5.5 per cent this year — something most western countries can only dream of these days — but this is still the lowest in more than 25 years of economic planning, Mr Razaqzada adds. Even this target could prove hard to hit, with the <a href="https://www.thenationalnews.com/business/economy/2022/04/19/imf-lowers-global-growth-projections-as-ukraine-russia-war-dents-economic-prospects/" target="_blank">International Monetary Fund cutting its Chinese growth forecast</a> to 4.4 per cent, Dan Dowding, director of wealth management at Patronus Partners, says. The Chinese authorities face a tough choice over Covid-19 and there is no quick fix. “Even if the current zero-Covid policy was reversed or eased, a high prevalence of Covid cases is still going to hit the country’s economic activity,” he adds. This will aggravate existing post-pandemic problems in global supply chains and inflationary pressures, David Jones, chief market strategist at Capital.com, warns. “Exports have dropped and global manufacturers are seeing their waiting lists grow again,” he says. Yet <a href="https://www.thenationalnews.com/business/money/2022/05/05/what-does-the-us-federal-reserves-interest-rate-rise-mean-for-uae-residents/" target="_blank">rising interest rates </a>and Russia’s war in Ukraine remain the bigger worry — and that will continue for the rest of the year, he adds. “Central banks have been behind the curve on inflation and appear to be desperately playing catch up.” Raising interest rates too far too quickly could have severe consequences, Mr Jones warns. “It is difficult to see central banks pulling off the perfect balance here.” China’s President Xi Jinping also faces a tricky balancing act, between suppressing Covid-19 and keeping the economy going. Yet China’s GDP growth still beat estimates to grow 4.8 per cent in the first quarter, up from 4 per cent in the final three months of last year. The country retains the power to move markets in a positive direction, Chris Beauchamp, chief market analyst at online trading platform IG, says. “Crucially, the magic promise of Chinese stimulus has appeared, pushing up commodity prices and giving US and European stocks a lift,” he adds. This is a tough year all round for investors, George Lagarias, chief economist at Mazars, says. “Equity and bond markets are in disarray. It marks, by far, the worst beginning of the year in this century,” he adds. The market is now “dominated by risks” and in desperate search of a guiding theme that will replace the so-called “Fed put”, where investors rely on the US Federal Reserve to offset any crash with yet more stimulus, Mr Lagarias says. Those days are now over as inflation storms back and other long-held assumptions are also over, he adds. “The Fed put is, for all intents and purposes, dead. China is no longer the world’s cheap manufacturer. The [post-Second World War] order is officially dead.” Inflation and Ukraine are the two biggest threats by some way, with China completing the hat-trick of troubles. However, brave investors are starting to view Chinese stock market volatility as a buying opportunity and are actively targeting commodity stocks with major exposure to the country’s growth story, says Victoria Scholar, head of investment at Interactive Investor. “We have seen renewed interest in China-sensitive shares on the FTSE 100 such as Rio Tinto and Glencore, which have been two of the most popular stocks on our platform lately.” Contrarian investors could seize this opportunity by snapping up China-focused exchange-traded funds (ETFs) at today’s reduced entry prices. The iShares MSCI China ETF is down 15.57 per cent year-to-date, which comes on top of a drop of 22.38 per cent in 2020. However, recent history shows that when the Chinese stock market flies, it really flies. The iShares fund rocketed by 53.07 per cent in 2017, for example, and also returned 22.68 per cent in 2019 and 28.69 per cent in 2020. The best time to buy may be when this market is down, rather than up. Other popular Chinese ETFs have also fallen by around 20 per cent this year, including KraneShares CSI China internet ETF, iShares China Large-Cap ETF and the SPDR S&P China ETF. It may be worth doing some research to see whether they should be added to your portfolio. These are troubled times for global investors, but as history has often shown us, that is often the best time to invest, provided you maintain a diversified portfolio and invest for the long term.