By Isabel Wang
No major supply chain disruption, but opening up of economy won’t happen anytime soon
Investors took some cheer this week from China’s latest COVID policy after massive anti-lockdown protests erupted across the country, rattling global financial markets, but economists think that markets have placed a “too high probability” on restrictions being relaxed soon.
China’s National Health Commission said on Tuesday it would ramp up COVID vaccinations for the elderly and pledged to rectify COVID control measures, a move that is seen as allowing the government eventually to relax restrictions and to reduce their impact on people’s lives.
After a sharp selloff on Monday driven by worries that China’s civil unrest and full-blown lockdown would stoke global supply chain disruptions, financial markets recovered amid hope of the pandemic policy relief.
U.S. stocks finished nearly flat on Tuesday after the Dow Jones Industrial Average dropped nearly 500 points in the previous session. Hong Kong’s Hang Seng Index jumped 2.2% on Wednesday, booking a monthly gain of over 25%. It is the largest one month percentage gain since 1998, according to Dow Jones Market Data.
See:Some markets cheer as China vows to vaccinate more elderly. Analysts see positive movement by officials
However, economists at Capital Economics are concerned that investors are too optimistic about China’s exit from its zero-COVID policy and think it will not happen soon.
“I think the markets have taken a half glass full approach to the situation. There’s definitely investors who are looking at the bright side of this and hoping for an end to zero-COVID in the near future,” said Jonas Goltermann, senior markets economist at Capital Economics.
“But it is not something we think is justified if we’re right that lockdowns continue and zero-COVID isn’t going anywhere. Eventually that will filter through and that probably will put renewed downward pressure on the Chinese stock market.”
For years, the Chinese equity markets had offered both domestic and foreign investors an opportunity to invest in one of the fastest growing economies in the world. However, Chinese equities have tumbled since the start of 2021 with Hang Seng China Enterprises Index down 43.3%. The iShares MSCI China (MCHI) exchange-traded fund (ETF) slumped 46.3% since February 2021, according to Dow Jones Market Data.
The price-to-earning ratios of China-related indexes and ETFs are at their lowest levels compared to their own history and to other financial markets, especially the U.S., where valuations are still very high, Goltermann told clients in a briefing on Tuesday.
“I can see where investors are coming from — the Chinese market looks cheap or undervalued relative to the past, (and) relative to peers. There is a turnaround into COVID that does have the scope for a significant rebound. Now, we don’t think that’s justified and based on zero-COVID outlook,” he added.
Related: China needs at least a year to end zero-COVID policy, experts say
Economists do not think the country is now ready to open up its economy, though recent updates to its COVID policy which simplify various protocols are a step in that direction. Earlier this month, investors applauded as the government announced tweaks to its zero-COVID policy, which include less amount of time international travelers entering the country must spend in quarantine and no more mass testing unless it is unclear how infections are spreading in an area. The changes raised a glimmer of hope that the government was considering easing its draconian pandemic restrictions.
In the best case scenario, the country is going to open up in 2023 or 2024, so the rest of the world won’t see any supply chain disruption, said Mark Williams, chief Asia economist at Capital Economics. But there is also a significant downside risk that the pandemic gets out of control and the country needs to impose a nation-wide lockdown across industries, which would feed through to the global supply chains and commodity markets.
White House on Monday said demonstrations in China haven’t resulted in supply-chain disruptions.
U.S. stocksrallied on Wednesday after Federal Reserve Chairman Powell said the central bank’s pace of interest-rate increases can slow as soon as its December meeting. The S&P 500 gained 3.1%, while the Dow rose 2.2% to exit a bear market and the Nasdaq Composite advanced 4.4%.
-Isabel Wang
(END) Dow Jones Newswires
11-30-22 1635ET
Copyright (c) 2022 Dow Jones & Company, Inc.
Read More: Here’s what stock-market investors are getting wrong about China and its zero-COVID