Macroscope | Why markets mustn’t overread the tea leaves on China’s Covid protests and reopening
- Even before the Covid protests, a shift in Beijing’s pandemic management had become the most talked-about issue in markets
- Divining Beijing’s intentions is a fool’s errand. Even investors can’t agree on which scenario poses more of a threat to asset prices: imposing more lockdowns or allowing the virus to spread more easily
Shortly after the Covid-19 pandemic erupted in March 2020, many investment strategists became amateur epidemiologists, producing reams of research on the virus – some of it highly technical – in the hope of determining the level of disruption and its implications for different sectors of the economy and asset prices.
Never mind that modelling the evolution of the pathogen posed enough of a challenge for experienced virologists, and that traders misjudged the economic fallout – particularly the severity of the inflation shock – as well as the speed and scale of the recovery in markets. The fear of missing out on a profitable trade and the need to explain and justify moves in markets led investors to speculate intensely about a subject they knew little about.
However, the demonstrations, which pose a significant challenge to China’s Communist Party, have broadened the scope of market speculation about the political calculations of President Xi Jinping, particularly how he intends to respond to the social unrest and the potential damage to his regime.
While it is not surprising that many international investors believe insufficient attention has been paid to China – the zero-Covid policy does not even figure in the top “tail risks”, according to Bank of America’s monthly global fund manager survey – markets are notoriously poor judges of political risk.
Foreign investors are particularly ill-equipped to assess and price risk in an opaque and difficult-to-read market like China, and even more out of their depth when it comes to predicting how Beijing’s pandemic management will play out.