Investors ignore China Covid spike at their peril

Investors ignore China Covid spike at their peril

HONG KONG, Nov 18 (Reuters Breakingviews) – The ongoing meteoric relief rally in Chinese stocks is understandable. President Xi Jinping had implemented a mix of tough policies targeting Covid-19, tech entrepreneurs and property developers that kept stock market indices underground and worsened capital flight – around $101 billion was taken out of the countries, reading between the lines of the official balance of payments data for the first six months of the year. The temporary easing on all major fronts is making investors happy; the Golden Dragon index (.HXC) of Chinese companies listed in New York has risen 37% since the end of October. Yet biology could still ruin this party.

Most of China’s trading partners have started living with the virus, but Xi still yearns to keep it out. Unfortunately, new, highly contagious strains took advantage of the wave of travel during October’s National Day week to tour the country. Surveys by consultancy Dragonomics recorded more than 200 cities a day reporting outbreaks in November, more than double the number seen during Shanghai’s traumatic lockdown in April. New cases have officially increased from around 1,000 a day in October to 25,353 on Thursday. There are reasons to suspect that the actual numbers are higher. Some cities have reported suspected case numbers, belied by tough quarantine policies. Others want to accelerate away from zero-Covid to relieve their local economies, as the city of Shijiazhuang in Hebei tried to do, which could lead to under-reporting.

Unfortunately, state propaganda outlets have invested two years in terrifying citizens about the virus, which means not everyone is comfortable with easing epidemic controls. Local media responded to conspiracy theories about foreign vaccines while pandering to the local traditional medicine industry. As a result, many older people refused to be bitten. The partial success of containment has slowed the development of herd immunity while vaccination rates have stabilized.

Unless infections are quickly brought under control by existing methods, three unpleasant scenarios are worth considering. In the first, Beijing is quarantining even more tightly. In the second, Covid-19 is finally unleashed in China, killing unvaccinated elderly people as it did in Hong Kong earlier this year. Alternatively, the current virus strains might prove less deadly, which would keep the ultimate death rate low, but with no way of knowing this in advance, many Chinese would likely sequester themselves in anyway. the panic.

Economically, any of these scenarios could replicate the first quarter of 2020, when GDP contracted by 6.8%, wipe out any relief recovery and further reduce profits for companies in contact with the consumers like Alibaba (9988.HK) and Starbucks (SBUX.O). They will fuel the unrest that has erupted in the streets and hobbled production lines at iPhone maker Foxconn (2317.TW). It was high time to review Beijing’s approach to the pandemic, its businesses and its economy. It may also be too late.

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BACKGROUND NEWS

China recorded 25,353 new Covid-19 infections on November 17, according to National Health Commission data released on November 18, compared with around 1,000 new cases per day in mid-October. This is comparable to high national contagion rates in April when Shanghai was forced into a draconian lockdown from early April to June.

Beijing announced minor relaxations of the country’s pandemic policy on November 11, including shorter quarantine periods and more narrowly targeted lockdowns.

The Hang Seng China Enterprises Index in Hong Kong is up nearly 30% over the past 14 trading days, according to Refinitiv data, while the onshore benchmark CSI300 has gained 9%. The yuan also strengthened slightly against the dollar after a long period of decline.

Editing by Una Galani and Katrina Hamlin

Our standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust.

Pete Sweeney

Thomson Reuters

Asian Economics Editor Pete Sweeney joined Reuters Breakingviews in Hong Kong in September 2016. Previously, he was Reuters Chief Correspondent for China Economics and Markets, leading teams in Shanghai and Beijing; previously, he was editor-in-chief of China Economic Review, a monthly magazine focused on providing news and analysis on the mainland’s economy. Sweeney came to China as a Fulbright Scholar in 2008 and in that capacity conducted research on China’s aviation industry and outbound mergers and acquisitions. In previous incarnations, he’s helped resettle refugees in Atlanta, covered the European Union from Brussels, and mistimed his craft beer entrepreneurship in Quito even as Ecuador’s currency s was collapsing (it wasn’t his fault). He speaks Mandarin Chinese, to the detriment of his Spanish.

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