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In a major policy pivot, China has withdrawn some key requirements under the zero-Covid regime, but concerns are rising on the potential impact of this change as new cases continue to rise. While some experts see China reopening as helping the economy and financial markets, others see the turnaround from strict Covid policies as causing undue harm.
Last week, China revoked some restrictions such as the 48-hour-old negative PCR tests and compulsory quarantine in government facilities for close contact with Covid patients. The latest of these changes is the shutting down of the state-mandated app used to track people’s movement.
The latest policy change on the ‘Communication Itinerary Card’ app eases travel restrictions for the Chinese, right ahead of the Chinese New Year when travel numbers are known to surge. Travel between provinces has now been eased and Covid restrictions have been removed. However, China’s borders are still sealed for international travel.
“On paper, these changes seem positive for economic growth…they should help boost consumption and economic activity in general, says Fisher Investments. “But there are a lot of ifs here. Should Covid rip through the populace this winter and hospitalization and death rates spike, the political calculus could shift back from reopening to protection.”
What is threatening China’s reopening?
Just last week, China reported nearly 35,000 new Covid cases, and the easing of restrictions is coinciding with the sudden rise in positive cases. Feng Zijian, an advisor on China’s Covid task force, has warned that the ongoing surge in cases may infect 60% of the country’s population, with numbers worsening as people travel around the country to meet family and relatives during the upcoming holiday season.
“A tsunami of cases is coming no matter if they stick to zero Covid or not,” Jin Dong-Yan, a virologist at Hong Kong University, told The New York Times.
While Chinese social media is filled with celebrations on easing Covid policies, reports indicate that there is a spike in infections across the country. People are now complaining of chaos due to the sudden removal of Covid restrictions as no concrete roadmap to recovery is in place. Social media users are complaining of disruptions to daily life, with shops closed and delivery services affected, while pharmacies run short on key drugs needed to fight the virus.
Public health experts in China are also discussing the vaccination rates, which had stagnated over the past year as the country relied heavily on mass testing and containment strategy. Cities which were in a complete lockdown have seen restrictions being revoked overnight causing confusion among residents, especially as fresh cases continue to climb.
Chinese hospitals are seeing long lines of people complaining of fever and the health system seems too unprepared and understaffed to handle a fresh surge.
Impact of zero-Covid pivot
China reopening policies first aided a rally in financial markets, but investors are now wary of the impact on the country. Currency trading desks are sitting empty as traders are calling in sick, with currency volumes falling drastically over the past few days. Financial firms, asset management companies and other market participants are implementing their own testing and treatment measures to avoid a breakout in offices.
Incidentally, some of these same offices had to force employees to live in the office and sleep on their desks due to lockdowns enforced by local governments.
Equity investors were quick to book profits on Monday, awaiting clarity on the China reopening path. Separately, China’s airlines and travel-related stocks as well as listed funeral service providers and pharma stocks saw a surge in share prices.
“2023 is not going to be easy,” Kieran Calder, head of equity research for Asia at Union Bancaire Privee, told Bloomberg. “We’re cautiously optimistic about reopening in China. The big swing factor is how China gets out of Covid and how fast.”
Similar opinions have been expressed by asset management firms around the world. Morgan Stanley in a note said that China’s reopening “path will be bumpy.” Blackrock Investment Institute wrote, “Activity is restarting, but we see China on a path to lower growth.”
The rise in economic activity could also spell trouble for the global energy markets, with S&P Global expecting oil and gas demand to rise exponentially. “Were it not for this demand weakness, prices of all commodities would have undoubtedly been higher, as energy supply not absorbed by China shifted to other areas, highlighted by LNG supply shifting to Europe,” S&P said in a report.
Talking about overall domestic consumption, consumer spending is likely to stay muted. Last month, e-commerce giant Alibaba skipped announcing the data from the Single’s Day sale. But with China reopening, economic growth may accelerate, causing inflation to pick up and the People’s Bank of China may be forced to intervene, bringing consumer demand lower.
“A surge in demand from reopening may not be balanced by a similar surge in supply,” writes Jeffrey Kleintop, Managing Director and Chief Global Investment Strategist at Charles Schwab.
Manufacturers in China are sceptical of the sudden change in Covid-19 stance and are expecting rising cases to further slow production. While the closed-loop systems somewhat worked to protect factory output, they caused frustration among the workers as seen by the violent protests at the Foxconn factory.
“An easing of these restrictions, as we’re seeing now, may lead to some stress in the near term, when mass infections disrupt factory operations, but if we consider the outlook in a few months, a stabilization of the pandemic and the normalization of logistics will be great news for manufacturers,” Xu Tianchen, an economist at the Economist Intelligence Unit, told Nikkei Asia.
Who will benefit from China reopening?
Analysts at Goldman Sachs Group have said that Hong Kong, Thailand and Singapore are likely to be the biggest beneficiaries of China reopening, as demand for overseas travel and imports rise. The American investment bank sees Hong Kong’s GDP to rise by 7.6%, while Thailand may see a boost of 2.9% in its GDP. Additionally, Goldman economists also expect small Asian economies to see incremental gains in GDP due to higher trade with China.
Another country that stands to gain is Indonesia, whose top officials and economists have expressed confidence that China’s reopening will increase economic activity between the two countries. China is Indonesia’s largest trading partner for both exports and imports, whereas Beijing is the second biggest foreign investor in Indonesia.
The Southeast Asian country has seen 2022 economic growth driven by coal, and with China’s new policy, it expects higher exports of commodities such as coal, processed nickel, iron and crude palm oil.
For investors, Chinese stocks are at attractive valuations. Winnie Wu, co-head of China equity research at BofA Global Research, in an interview with South China Morning Post said that there is room for 20%-30% expansion in valuations over the next few months, supported by double-digit corporate earnings growth.
“Looking ahead to 2023, the path to covid reopening in China is likely to be bumpy, with three steps forward and then two back. However, the direction of travel is clear: China will have to learn to live with covid and is finally laying the ground to minimize the health impacts of doing so,” says Invesco.
