Why investors should be wary of narrative of China’s economic doom

As China moves away from its ‘zero-Covid’ policy, there is now a shift in narrative suggesting the move will also hurt prospects for its economy
This narrative ignores the many policy levers at Beijing’s disposal and assumes Beijing is not thinking through the change even though it has latecomer advantage

Neal Kimberley

Published: 10:00pm, 13 Dec 2022

Why you can trust SCMP

“What Happens in China Does Not Stay in China”. That is the title of a discussion paper published under the auspices of the US Federal Reserve last month. It’s a concept investors should bear in mind as China enters a new phase in handling Covid-19.

Put simply, China’s economy is just too big to ignore. Admittedly, investors looking at China’s economic prospects right now might be forgiven for being a trifle confused.

While Beijing’s rigid adherence to its “zero-Covid” policy certainly impeded economic activity in China, there is now a shift in narrative towards suggestions that Beijing’s decision to move away from that same policy will also impair prospects for the Chinese economy as the country experiences a surge of new Omicron variant cases. It would appear that Beijing cannot do right for doing wrong.

Investors might conclude that the line of least risk is to look away until the outlook for the Chinese economy becomes clearer, but looking away is not really an option. The Fed-published discussion paper made the point concisely: “Spillovers from China reverberate through the global financial system through sentiment effects due to its importance as a driver of global business activity.”

One good example of this is the automobile industry. The discussion paper notes that in 2021, “China accounted for about 40 per cent of global vehicle sales, almost double the size of those in the United States.” With that level of market domination, it should come as no surprise that consumer retrenchment in China, linked to the “zero-Covid” policy, has a global spillover effect.

Alarm bells must therefore have rung in automobile industry boardrooms last week when the China Passenger Car Association revealed that sales of passenger vehicles fell 9.5 per cent year on year in November to 1.67 million units, their first decline since May.

People wearing face masks ride scooters in the central business district of Beijing on December 7. The outlook for the Chinese economy is unclear, but investors can’t afford to look away given its global impact. Photo: EPA-EFE

But this also has implications for investors. Those who buy into the idea that the move away from “zero Covid” will have a materially negative impact on the Chinese economy might feel downbeat about the prospects for listed car manufacturers with major exposure to China’s markets.

However, those who conclude that relaxation of lockdown measures will unleash pent-up consumer demand in China could take the opposite standpoint. Either way, China’s status as a global economic leviathan means a view has to be taken.

But there is another angle worth exploring. This relates to China’s specific situation and might prompt investors to question whether Beijing’s evolving pandemic management stance inexorably results in continued impairments to Chinese economic activity.

First, given that Covid-19 was first identified in Wuhan, China necessarily led the world in devising strategies to deal with the situation. Other countries followed in due course as the virus spread around the world.

Globally, trying to contain Covid-19 was the primary objective. While the resort to lockdowns caused massive damage to the world economy, that damage was an unwelcome but unavoidable consequence of decisions made. But that was then and this is now.

China’s departure from its “zero-Covid” policy brings it closer to where other major economies now stand, the rest of the world having earlier concluded that the virus is now endemic and must be lived with. But moving later has also given Beijing – always keen to ensure social stability and promote economic prosperity – ample time to plan on how to come out of the policy.

Yet the possibility that Beijing has engaged in any such pre-planning is notably absent from the narrative stressing the economic risks of moving away from a “zero-Covid” policy.

This narrative also does not take into account the policy levers at China’s disposal as it enters this new phase of coronavirus management or Beijing’s renewed emphasis on economic growth in 2023.

China’s next challenge: regain investors’ trust after zero-Covid exit

Unlike the Federal Reserve, the People’s Bank of China (PBOC) has no problems with inflation. Consumer inflation in China in November was an annualised 1.6 per cent, down from October’s 2.1 per cent reading, while factory gate prices dropped for the second month in succession.

The PBOC has room to provide additional monetary policy support if it is required. Additionally, the mood emanating from Beijing suggests an increased emphasis on restoring economic stability next year, with many policy advisers calling for a 5 per cent growth target for gross domestic product.

Beijing has the policy levers and the determination to move China’s economy up a gear. Perhaps that is the real narrative investors should focus on.

Neal Kimberley is a commentator on macroeconomics and financial markets