How China’s hardline zero-Covid approach is wreaking havoc on its US$9.6 trillion stock market

- The Politburo Standing Committee’s stance indicates that the zero-Covid policy take precedence over economic growth, Saxo Markets strategist Redmond Wong says

- The Shanghai Composite Index has slumped 17 per cent this year, making it the worst performer in Asia

9 May, 2022

China’s adherence to a stringent zero-Covid policy has clouded the outlook of its US$9.6 trillion stock market, as pessimism grows that the virus-containment strategy will come at the cost of economic growth.

The Politburo Standing Committee, the Chinese leadership’s highest decision-making body, at a meeting on Thursday struck a surprisingly harsh tone to defend the Covid policy, pledging to fight any attempt to “distort, question and dismiss” the approach. The assertion officially put an end to the debate even among government officials on whether Beijing should ease its lockdown measures that have stoked anger among the public, suspended production at factories and paralysed the supply chain.

The hardline stance also marks a setback for stock investors who had bet that Beijing would relax the zero-Covid approach to strike a balance between stabilising growth and bringing the pandemic under control. China’s Shanghai Composite Index has slumped 17 per cent this year, making it the worst performer in Asia, as the lockdowns of Shanghai and the nation’s other 40 cities heighten jitters of a deepening slowdown.

The gathering of the seven-member Politburo Standing Committee headed by President Xi Jinping resembled a “wartime mobilisation that called for unity, determination and sacrifice”, signalling that the zero-Covid policy takes precedence over economic growth, according to Redmond Wong, strategist at Saxo Markets.

“Relaxation of dynamic zero-Covid policy is now completely off the table,” he said. “This is going to have enormous negative impact on the economy and the financial markets. The much talked about economic, fiscal and monetary stimulus policy initiatives, even having been rolled out, will be just pushing on a string.”

The lockdowns on the mainland have also sent stocks in Hong Kong and Taiwan plunging, as bets recede that Beijing will loosen regulatory curbs on Chinese tech juggernauts to bolster growth while logistics snarls upend operations at the likes of chip giants like Taiwan Semiconductor Manufacturing. The correlations between the Shanghai Composite Index, the Hang Seng Index and the Taiex have now risen to the highest since at least September, according to Bloomberg data.

While the Shanghai gauge now trades at 12.1 times earnings, or about a fifth below its five-year average, it still presents no good entry point, according to Guotai Junan Securities.

“The market hasn’t been slow in reacting to negative factors because of the low valuation now,” said Fang Yi, an analyst at the Shanghai-based brokerage. “There’s still a pretty high risk premium out there because of the unpredictability of the virus variant and the complexity of overseas monetary tightening.”

Still, there are optimists. Citic Securities says that Chinese stocks will rise in a rally that will probably last for months, pointing out that the Covid-19 outbreak has already peaked and the reopening of the economy should get under way soon, helping economic data to pick up in May.

Shanghai, China’s biggest commercial city, is still fighting a prolonged battle against the Omicron coronavirus variant. Its daily symptomatic cases saw a resurgence on Sunday, rising by the most since April 29 to 322, official data showed. The flare-up prompted the local authority to ramp up tightening measures, restricting the movement of medical workers and banning deliveries in some districts that have reported no new infections over the past few weeks.

“China is trying to fight a war without weapons, [which is why] extreme measures like the extended Shanghai lockdown make sense [to them],” said Wang Qi, chief investment officer at MTI Management in Hong Kong. “This is the only explanation that can rationalise everything and connect all the dots. The key question is when China will end its zero-Covid policy.”

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