Macroscope | China’s sudden reopening has spooked markets, in a case of being careful what you wish for

Markets have been clamouring for Beijing to end the zero-Covid policy for some time, well aware that the exit would not be a smooth one

Now that China has opened up much faster than anticipated, causing major business disruptions, investors have taken fright

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A street in Huangpu district, Shanghai, on Wednesday. China’s sudden reopening has caused widespread market disruptions. Photo: AFP

Published: 11:00pm, 22 Dec 2022Updated: 12:05am, 23 Dec 2022

Do financial markets really want China’s economy to open up? Just a few months ago, it would have seemed absurd to even ask such a question. Beijing’s zero-tolerance approach to the Covid-19 pandemic, which relied on frequent lockdowns and mass testing to suppress the virus, was viewed as the biggest impediment to stabilising asset prices and allowing stimulus measures to work more effectively.

The relaxation of some of the restrictions, and rumours that others would soon be lifted, caused Chinese offshore equities to soar last month as the “reopening trade” took hold. Many Wall Street firms, which had been looking for reasons to be more optimistic about China, turned bullish on the country’s shares, enticed by their historically low valuations.

Yet, since the government unexpectedly scrapped nearly all of its internal controls at the beginning of this month, sentiment towards China has soured. While even bullish investors acknowledged that the reopening process would be bumpy and perilous, the shift in the tone of many investment banks’ research reports over the past few weeks is remarkable.

In a note published on December 13, Morgan Stanley, which recently lifted Chinese stocks to an overweight position in its portfolio, said it no longer viewed the reopening process as attractive and recommended that clients hedge against mounting risks.

These threats stem mainly from anecdotal evidence pointing to a deadly exit wave, exacerbated by Beijing’s lack of preparation for a major reopening. The failure to ensure that the elderly population is fully vaccinated, and that the healthcare system can cope with a dramatic rise in cases, has come home to roost.

While the trajectory of the outbreak is uncertain, many who had hoped that China would learn to live with the virus now fear the consequences of a hasty retreat from zero-Covid.

.css-1m2rp1p{color:#34b8b5;}Macroscope | China’s sudden reopening has spooked markets, in a case of being careful what you wish for

Macroscope | China’s sudden reopening has spooked markets, in a case of being careful what you wish for