China: ready to jumpstart its economy

By introducing a series of drastic measures in response to the Omicron variant, Beijing has caused an unprecedented shock to the Chinese economy – one that is even greater than experienced in early 2020. The economic outlook is so bleak that it could turn out to be positive for the country’s stock market. Our fund manager, Ed Yau, tells us more.

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Zero-COVID: a costly strategy

Shanghai’s initial temporary lockdown ended up dragging on for months. Restrictions were finally lifted in early June and the 25 million residents of the business capital were able to put the surreal weeks of lockdown behind them.

The restrictions were part of the Chinese government’s zero-COVID strategy. While they managed to limit the number of COVID-19 deaths across the country, the latest economic data shows the lockdowns have brought the economy to a standstill in April and May. Growth in the second quarter could be zero or even negative – something that has only happened twice since 1976.

Even if the economy manages to recover strongly in the third quarter, the government’s initial full-year growth target of 5.5% now looks largely unachievable. Such a rebound would be particularly important to the Chinese Communist Party in the run-up to its National Congress in the fall.

Time for “whatever it takes”

While Beijing appeared to have adopted a more accommodative tone on economic policy in November 2021, the stimulus measures that followed were unconvincing and inconsistent with the statements of support from policymakers. However, given the lockdown’s impact on the economy and the uncertainty caused by the war in Ukraine, the Chinese government had no choice but to take more aggressive action.

The People’s Bank of China has lowered its benchmark mortgage rate twice since mid-May. This is likely the first of a series of measures designed to revive the country’s property market. Party officials have also reiterated their support for the country’s tech sector in recent comments, aiming to reassure investors by signalling that the worst of the regulatory crackdown is over.

Turning the page on pessimism

Stabilising the economy will undoubtedly be the government’s priority for the rest of the year. As we saw in March 2020, stock markets tend to rally as soon as investors are convinced of the generosity of central bankers to steer clear of a crisis, regardless of the economic outlook. The state of China’s economy has deteriorated to such an extent that large-scale government intervention now seems inevitable. Somewhat counterintuitively, the economy has become so fragile that it could be good for stock market performance, since economic stability has replaced regulatory crackdown as the new priority.  

Meanwhile, the prospect of economic stimulus from Beijing and the easing of lockdown measures appear to have drawn some investors back to Chinese equities. The domestic stock market, as well as Chinese tech stocks, have started to outperform in recent weeks after some choppy quarters. This could be a sign that the pessimism that had dominated investor sentiment has finally passed its peak.


Find out more about this investment theme: Emerging Markets Best Opportunities.


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