Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., Wednesday, November 9, 2022.
Michael Nagle | Bloomberg | Getty Images
Global stocks fell on Monday after rare protests erupted across China over the weekend amid growing unrest over the country’s zero-Covid policy.
An apparent easing earlier this month had fueled hopes of a gradual easing of the country’s strict Covid controls. However, local shutdowns in recent days in response to surging infections have reignited fears about both national economic recovery and global supply chains.
Asia-Pacific stocks fell on Monday, with Hong Kong Hang Seng Index losing 1.6% for lead losses, while the pan-European Stoxx 600 fell 0.9% during the morning session in Europe. US stock futures also pointed to a lower open on Wall Street on Monday.
Nearly three years of lockdown measures have weighed on the Chinese economy and pushed youth unemployment to almost 20%. Meanwhile, profits at Chinese industrial companies fell 3% from January to October as Covid dampened activity.
Citi strategists said the restrictions in relatively less affected cities like Shenzhen and Shanghai highlighted the difficulty China is facing moving toward reopening.
“The road to reopening is likely to be noisy with local infections likely to remain high through the winter months and until vaccination rates increase more significantly,” Citi strategists said in a note on Monday. .
“Although the decline in sentiment due to protests on the mainland and the tightening of Covid restrictions in several cities do not bode well for sentiment, we are cautious not to interpret them as too bearish.”
Although protests have intensified in recent days, coverage has been limited in China and the risks associated with another large-scale outbreak are heightened by an aging population and low vaccine uptake.
As such, Rory Green, head of China and Asia research at TS Lombard, said the government is he is unlikely to change course due to this “healthcare reality”, and said that despite the prospect of more targeted and optimized lockdowns, the “outcome for the economy is grim”.
“We believe China will remain in this Covid coma until at least the second quarter of 2023 and actual growth – not that reported by officials – will struggle to exceed 1% over the next five months,” he said. he told CNBC on Monday.
The government has stepped up its efforts to support the economy, including its struggling real estate sector. The People’s Bank of China announced last week that it would cut the reserve requirement ratio for banks by 25 basis points from Dec. 5, freeing up about $70 billion to support the country’s slowing economy.
However, Green argued that the hit from the lockdowns, particularly to consumer confidence, service-sector jobs and wage growth, was so significant that the PBOC’s monetary policy measures “effectively push a string”.
“They’re actually already very loose, certainly relative to demand, so these rate cuts will help a bit at the margin – the property developer support measures significantly reduce the tail risk of a disorderly exit for some of these developers. – but in terms of re-accelerating the economy, it’s really a Covid and consumer story and it won’t happen until the second quarter of next year,” he added.
Supply chain disruptions
These comments were echoed by the Swiss lender UBSwho said in a note on Monday that rising Covid-19 infections would remain a significant drag on growth.
“It will take longer to understand the impact of reported public opposition to Covid restrictions
and the official response, but the latest developments add uncertainty for offshore investors and may weigh on sentiment,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. UBS does not yet see this affecting its base case for a full reopening around the third quarter of 2023.
Haefele noted that a broadening of infections could exacerbate global supply chain disruptions and cause national headwinds spilling over into global markets.
So far, supply chains have been less severely affected than during the April outbreak, as the wave has not spread to major ports or manufacturing hubs in China, but the assembler of iPhone Foxconn has faced major protests from workers over the past week over working and living conditions.
Haefele noted that this would likely lead to a 30% reduction in Foxconn shipments in November, with lingering risks that broader supply chain pressures could increase, potentially affecting exports of machinery and appliances.
“We therefore do not expect the economic or market headwinds in China to ease significantly over the coming months. Policy support remains focused on stabilizing the economy, rather than stimulating growth, in our view,” Haefele said, adding that growing social discontent “adds to execution and implementation risks” for Beijing.
Accordingly, we remain neutral on Chinese equities. We also view China’s slow recovery as a risk to the global economy and markets,” Haefele said.
“Against this backdrop, we advise investors to focus on defensive assets in the equity and fixed income markets.”
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