Markets had a volatile end to November, driven by turmoil in China as the world’s second largest economy contends with lockdown protests and mounting Covid infections as it sticks (for now) with its zero-Covid policy.

Renewed restrictions in response to new outbreaks of Covid sparked levels of protest not seen in decades in China. A show of force by police and security forces seems to have calmed things down for the time being and China also announced on 29 November a drive to vaccinate its elderly population which would be a key first step towards living with the virus.

This saw Chinese stocks recover ground, though they remain significantly lower year-to-date. Commodity prices and resources stocks also enjoyed a rebound. China is a big consumer of global commodities and the fortunes of its economy have significant implications for demand.

Also supporting the move higher in Chinese shares was a rally in property developers as regulators lifted a ban on equity refinancing for listed property firms. This represents a fresh support measure for a sector which has been under significant pressure.

Despite the rapid turnaround in sentiment, the chances of Chinese premier Xi Jinping abandoning zero-Covid entirely look slim in the short term given the blow it would represent to his authority.

Even if the will was there, it’s not clear if China can relax restrictions materially yet. The country has relied on domestic vaccines over whose effectiveness there is some doubt and because it has kept the rate of infections low, there is far less natural immunity than seen in the West.

Even if China was to perform an about face on Covid tomorrow, there will already have been damage to its economy and disruption to global supply chains.

Rupert Thompson, chief economist at asset manager Kingswood, comments: ‘Near term, the latest flare-up will put Chinese growth under renewed downward pressure and there is little prospect of the zero-Covid policy being relaxed significantly. Vaccination rates amongst the elderly are still too low, winter is underway, and it would be seen as a sign of weakness to bow to the demands of the protesters.

‘More importantly, current events can only reinforce the pressure on China to stick with its plan to step away from zero-Covid next year, most probably in the spring. This should fuel a rebound in the economy and, along with cheap valuations, is the basis for our positive medium-term view on Chinese equities.’

‹ Previous2022-12-01Next ›