
Lifting of Shanghai lockdown and stimulus foster cautious optimism on China’s economy
- The prospect of lockdowns ending, aggressive stimulus and affordable equities could set the stage for a ‘reopening rally’ as market confidence improves
- If the extended lockdown in Shanghai was a one-off and not a preview of what is to come, China’s economy can bounce back
The most pessimistic prediction is from Bloomberg Economics, which expects growth of just 2 per cent this year – far below the market consensus of more than 4 per cent. If accurate, that would be the first time China’s economic growth has lagged behind that of the US since 1976.
It has contributed to the global growth scare that has gripped markets in the past several months. The lack of an exit strategy, coupled with worries that more cracks in China’s pandemic defences will lead to further citywide lockdowns, have fanned fears of a dangerous and irreconcilable conflict between growth and public health.
However, the reality is that it is not the zero-Covid policy per se that spooked markets – the same strategy underpinned China’s successful reopening in 2020. Rather, the fear is that it is no longer effective because of the highly transmissible Omicron variant.
In a report published on May 23, Nomura argued that the turning point for sentiment towards China was contingent on the fate of the zero-Covid policy, as opposed to the daily case count and monthly economic data.
The last thing China needs right now is even bigger outbreaks and more citywide lockdowns. Those are the price it would have to pay for living with the virus, given its patchy vaccine coverage and an unprepared healthcare system.
In a report published on May 13, JPMorgan said the only way out from zero-Covid was to sever the link between infections and hospitalisations, preferably through mass vaccination with more effective Western vaccines. However, markets want quick fixes.
As Shanghai reopens, what Day 1 without Covid measures will look like
To be sure, there is little point in stepping up support when consumers and businesses are worried about further lockdowns. But if the virus can be suppressed long enough for confidence to improve, there is more scope for a stimulus-fuelled “reopening rally”.
When asset prices in other major economies are under severe strain because of the dramatic shift to tighter policy, Chinese equities – which priced in all the bad news some time ago and are trading at historically low valuations – look like a better bet.
A bearish view on China will remain the consensus for some time. Yet, the market verdict of more than two years of zero-Covid is mixed. Provided Shanghai’s protracted lockdown was a one-off and not a taste of things to come, China’s markets can still bounce back.
Nicholas Spiro is a partner at Lauressa Advisory
