China’s zero-Covid policy to boost onshore stocks with market shielded from rout in US, Europe and Hong Kong

The Shanghai Composite Index has lost only 0.6 per cent since the discovery of Omicron, while US and European stocks lost US$580 billion in market value
While Omicron is likely to eventually enter China, tough zero-Covid policy will block community transmission, top health official said.

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Zhang Shidongin Shanghai

Published: 3:47pm, 30 Nov 2021

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China’s zero-Covid policy may have helped shield the onshore market from the Omicron-induced rout that sliced about US$580 billion from benchmarks in the US and Europe. That’s likely to boost the local market as a safe harbour for investors.

Yuan-denominated shares have held their ground since Friday when the discovery of a new Covid-19 strain began to roil markets, knocking the S&P 500 Index down by 1 per cent and Europe’s Stoxx 50 Index by 4.3 per cent through Monday. Crude oil tumbled 14 per cent.

The Shanghai Composite Index fell 0.6 per cent in those two days, while the Hang Seng Index in Hong Kong retreated 3.6 per cent.

China has kept its borders shut to contain the pandemic in the toughest measures worldwide, which include massive testing, strict lockdown and rapid vaccinations. Strategists from Citic Securities to Guotai Junan Securities said the outperformance will boost the allure of onshore stocks and may accelerate purchases by foreign investors.

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The zero-Covid policy is “a unique advantage of China’s economy”, said Qin Peijing, a strategist at Citic, the nation’s biggest brokerage. “The new virus strain will have a greater potential to dent the recovery of economies elsewhere than in China.” Local equities and government bonds will become more attractive to foreign investors.”

Meanwhile, optimism on overseas stocks has waned, according to Credit Suisse. A pullback in stocks has seen global investors flocking to bonds as a hedge against risk associated with the Omicron variant, said Michael Strobaek, its global chief investment officer.

US money manager Invesco predicted that European stocks will probably be among the hardest-hit globally, potentially losing as much as 10 per cent from the level on Friday.

The Shanghai Composite Index rose less than 0.1 per cent to 3,563.89 on Tuesday. The gauge fell as much as 1.1 per cent on Monday before recouping almost all the decline at the close of trading. While Chinese stocks dominate the Hong Kong market, they are more susceptible to global capital flows.

Local traders are betting on new-energy stocks, driving a gauge of growth stocks listed on the ChiNext board in Shenzhen to near a six-year high.

A man takes photos of a big screen displaying stock prices at the listing ceremony of the first batch of IPOs trading on ChiNext in Shenzhen in August 2020. Photo: Xinhua

Contemporary Amperex Technology, the maker of lithium-ion batteries for Tesla and other electric-vehicle manufacturers, contributes most of the gains. The battery maker is the biggest member on the ChiNext index with one-fifth of index weighting and also China’s second most valuable stock after Kweichow Moutai.

The Omicron variant is likely to enter China, said Xu Wenbo, head of the National Institute for Viral Disease Control and Prevention. Mainstream tests, however, will be able to detect any cases and the country’s zero-Covid response will block community transmission, he told state broadcaster CCTV on Monday.

“The risk from the mutating virus still needs to be assessed,” said Chen Xianshun, an analyst at Guotai Junan. “But given China’s experience and track record of containment, there’s no need for panic for its impact on the capital market.”