China’s zero-Covid policy, an extreme outlier among nations’ late-stage pandemic strategies, is not changing anytime soon. This is despite its damaging effects on the economy and its unpopularity with the growing Chinese middle class. In a speech delivered at Wuhan last Tuesday, China’s President Xi declared he would rather “temporarily sacrifice a little economic growth” than “harm people’s health”. Given how long his ‘Zero-Covid’ policy has been in place, one might wonder how temporary that sacrifice will be.
It is curious, then, that Chinese equities are faring so well. The CSI 300 index has been on an upward trajectory for the last two months, and June looks set to deliver the best monthly returns in two years. Xi’s speech coincided with a slight pullback midweek, but even that had recovered by the end of Thursday’s trading. If Chinese citizens are concerned with the zero-Covid policies, investors seem unphased. Some have suggested this may be down to a softer Covid policy than meets the eye. Despite the President reiterating the party line, China’s State Council announced last week that the quarantine for international arrivals would be cut in half – down to seven days in a government facility, followed by three days at home. This comes a few weeks after the President himself declared that Covid containment must be balanced against economic growth – a sign of shifting priorities in Beijing.
We suspect other reasons for China’s stock market strength, and that investor optimism is down to policy changes in other areas, and early signs of returning domestic growth. Beijing recently signalled it would also take a less severe approach to the tech sector, which suffered from crackdowns over the last two years. This is a positive turn, and indicates a general easing up of the Party’s interventionism. Last week, the People’s Bank of China (PBoC) pledged to keep monetary policy accommodative as the economy recovers from its slowdown. It follows on the heels of earlier measures to loosen policy, such as the PBoC’s reserve ratio cuts, which have been an important factor in boosting China’s credit impulse (the contribution of credit to GDP).
More generally, economic readings are improving. Recent surveys of business sentiment show a rebound from lockdown malaise, with the manufacturing purchasing manager’s index (PMI) jumping to 50.2 in June, from 49.6 in May (a level of 50 or above indicates expansion). This move is broad-based too, with all major sub-components increasing. The non-manufacturing PMI (comprising services and construction) jumped to an even greater 54.7, up from 47.8 last month.
These signs all point to an improvement in the world’s second-largest economy. And with a supportive policy backdrop (for investment at least) we could expect the rebound to go further. We should not underestimate the headwinds that zero-Covid brings, but with virus cases decreasing through the summer months, short-term growth is likely to improve.
This article is for information purposes only – should not be perceived as financial advice. We recommend you should always speak to a financial adviser before making any investment decisions.
Please note, past performance is not a reliable indicator to future returns. Your investment may fall as well as rise and you may not get back what you put in.