What China’s COVID Setbacks Mean For Markets

China was originally held up as the success story for managing COVID. But two years on, Shanghai is locked down and Beijing is testing all its residents for COVID. This comes as the rest of Asia-Pacific is lifting restrictions and viewing COVID as endemic (Chart 1). On top of that, China’s excess death rate over the COVID period has been higher than numerous other Asia-Pac countries like Taiwan, Singapore and Australia (Chart 2).

And the lockdowns may not be over. A major reason behind China’s need for lockdowns is its vaccine strategy. China’s vaccines appear to have lower efficacy rates compared to other vaccines, and importantly the uptake of the vaccine has lowered amongst the older segment of the population. This suggests that until this changes, lockdowns may continue to be needed.

The economic consequences of this are clear. China will continue to rely on external demand and exports to support growth, while domestic demand will be suppressed by household caution. China’s activity data like PMI services and retail sales have shown weakness in March and will likely continue to show weakness in April (PMIs out on April 30). This augurs poorly for Chinese stocks. Their valuations may be low relative to history or to other countries, but the cyclical picture suggests they stay low for good reason. We’d therefore stay away from China equities.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)