Every month, Bank of America publishes the results of its closely watched global fund manager survey. The latest survey gathers the views of 292 investors with a combined US$833 billion of assets under management. One of the poll’s key questions concerns the risks that respondents believe could have the biggest impact on financial markets. The last time the Covid-19 pandemic was at the top of investors’ list of concerns was at the start of 2021, and even then the virus was not seen as a major threat to asset prices. This is not surprising. The roll-out of mass vaccination programmes has allayed fears about the pandemic, allowing most economies to reopen . Investors, moreover, are forward-looking, and tend to shrug off shocks as soon as they believe the bad news is priced in. This is already happening to some extent in the case of Russia’s invasion of Ukraine , even though the war continues to rage. Yet, while pandemic fatigue set in a long time ago, the unexpected lockdown of Shanghai , China’s financial capital and a city that had been relatively unscathed by the virus, has put Covid-19 back on investors’ radar screens. By some twist of fate, it is the major economy that had successfully kept the virus at bay with its uncompromising “zero-Covid” policy – a combination of sealed borders, mass testing, meticulous technology-based contact tracing and immediate localised lockdowns whenever cases appear – that has become the focal point of renewed concern about the pandemic. At a time when the withdrawal of liquidity by Western central banks has put markets under severe strain, and when fears about stagflation are intensifying, China’s desperate efforts to contain the worst outbreak since the pandemic began have startled investors and exacerbated tensions at the heart of its zero-tolerance strategy. The sudden lockdown of Shanghai, China’s most populous city and home to the world’s busiest port, takes the government’s battle against the virus into a new and more perilous phase. The fierceness of the backlash against the shutdown – many residents have struggled to obtain food and medicines – is matched only by the acuteness of the challenge in pursuing a containment policy that simultaneously meets the government’s public health, political and economic objectives. In a sign of how consequential Shanghai’s lockdown is for China and the global economy, 40.3 per cent of China’s gross domestic product is currently under full or partial lockdown, approximately twice the share at the beginning of this month, according to a report published by Nomura on Monday. The economic damage is plain to see. Survey data shows that manufacturing and services sector activity took a severe knock in March and fell back into contraction territory. Meanwhile, imports collapsed last month as restrictions disrupted freight arrivals and weakened demand. In a further blow to supply chains, congestion at China’s ports has worsened. According to data from Bloomberg, shipping queues have risen sharply over the past several weeks, with 222 bulk cargo ships waiting off Shanghai to deliver resources as of April 11, a 15 per cent rise compared with the previous month. Yet, it is not the economic costs that are most worrying, but the ominous signal Shanghai’s lockdown sends about the government’s likely response to future outbreaks. The financial hub’s costly mistake – the city failed to nip the highly infectious Omicron variant in the bud, prompting a citywide lockdown – and Hong Kong’s disastrous experience with the virus this year have emboldened Beijing to stick with its hardline approach. It has become increasingly clear that public health and political considerations – the West’s approach of “living with the virus” is a non-starter in a vast country with patchy vaccine coverage, less effective jabs and a Communist Party that prioritises stability above all else – outweigh economic ones. Shanghai stretched to breaking point under dynamic zero-Covid Shanghai’s lockdown is a wake-up call for investors who still believe the pandemic no longer matters. Although markets look at China through the prism of looser monetary and fiscal policy, it is the government’s zero-Covid strategy that matters more to the global economy right now. The results of Bank of America’s latest fund manager survey, published on Tuesday, revealed that expectations about stagflation have surged to their highest level since the 2008 financial crisis. This is mainly due to the fallout from Russia’s invasion of Ukraine. But the lockdown-induced disruption in China amplifies the risk of stagflation. Just when China is meant to be easing concerns about growth by loosening policy, its zero-tolerance stance towards the virus is having the opposite effect. Rather than betting the longer Beijing persists with its inflexible approach, the greater the likelihood of more aggressive stimulus, investors should recognise the underlying problem: indefinite and costlier lockdowns. The pandemic has not mattered to markets for some time. Yet, Shanghai’s shutdown shows the virus still has the capacity to wreak havoc on China’s economy and the rest of the world. Nicholas Spiro is a partner at Lauressa Advisory