China’s zero-Covid labyrinth

Shanghai, China’s biggest city, “has spent most of the past two months in a state of suspended animation”, says Nathaniel Taplin in The Wall Street Journal. Yet despite growing economic damage from a prolonged lockdown, policymakers have brought in only modest stimulus measures, perhaps because they think that “revving the monetary engine with much of the economy in partial lockdown might… simply blow asset bubbles”.

Until China “finds a way out of the zero-Covid labyrinth it has built for itself” an “extended period of subpar… growth” looks likely. The economic damage is becoming apparent. Chinese retail sales fell 11.1% compared to a year before in April, the sharpest slowdown since the initial coronavirus wave in Wuhan in March 2020. Sales of new homes are down 42%, with housing starts down by more than 44%.

“China’s economy performed a stunning feat in 2020,” says Tanner Brown in Barron’s. After shrinking 6.8% in the first quarter, the subsequent rebound was so strong that the country ended 2020 as the only major economy to register any growth. Yet a repeat this time looks harder. The property market, which accounts for nearly 30% of GDP, has been weakened by “numerous debt defaults”. The open-ended nature of zero-Covid policies is deterring investment: nearly a quarter of firms polled by the EU Chamber of Commerce in China are considering shifting investments out of the country.

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Investors recalibrate

Zero-Covid uncertainty, geopolitical tensions and a regulatory crackdown on big tech firms have driven the CSI 300 stock index down 19% so far this year. The Golden Dragon Index, which tracks US-listed Chinese shares, has fallen 58% over the past year. The golden dragons’ days may be numbered, though: this week ride-hailing group Didi notified the New York Stock Exchange of its plans to de-list. The move comes as Beijing looks to assert more control over Chinese firms with foreign listings.

There is still “money to be made” by those who keep on the right side of regulators, says Sofia Horta e Costa on Bloomberg. Yet Beijing’s “opaque and unpredictable decision making” is making traders jumpy. This month, Alibaba lost $26bn in value within minutes after a man who shared co-founder Jack Ma’s surname was accused of endangering national security (it turned out to be a different Ma).

There is now a debate about whether Chinese securities have become “uninvestible”, says The Economist. It’s more accurate to say that they have become “unanalysable” – it is hard to price all the geopolitical risks. “Unfortunately, few assets these days are entirely free of such risks”, as the Ukraine-driven surge in commodity prices shows. Stockpickers will need to start taking “a broader view of the world”.

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