China’s Resurgent COVID Wave & Market Selloff — Is the Country Becoming “Uninvestable”?
Just when you thought it was time to roll back into the old normal, a new set of tell-tale facts began to emerge from China.
There is a resurgent COVID-19 wave in China with 5,000+ confirmed new cases being reported everyday — the highest in two years. Some of China’s most important cities — Langfang, Shenzhen, Jilin — are now under lockdown (over almost 45 million people) to try and stop the spread.
After more than two years of the pandemic’s travesty, the world isn’t immune to resurgent COVID waves. However, the growing clusters in China are particularly significant considering how they are testing China’s “zero-COVID” strategy.
While countries around the world have learnt to live with the pandemic and cope with a mitigated approach combining partial lockdowns and restricted protocols, China’s resolve to stymie the virus from spreading stem-first is proving to be a costly and cumbersome experience.
Unfortunately, whatever happens in China doesn’t stay in China but takes the entire global economy for a spin. Let’s see how the new COVID wave is turning into a new headache for the world and also how it’s giving the West a reality check about financial involvement with China.
Back to Square One
The Shanghai Composite Index lost 5% on Tuesday, its worst-ever decline since February 3rd 2020 when the virus was creeping through the country the first time around. Another important index, Hang Seng, has dived by 12% in the last three consecutive sessions. Rise in caseload has sparked off sell-off fears again, especially among foreign investors who altogether offloaded more than $2.5bn worth of Chinese stocks in a single day — the highest offload since July 2020.
These events have sparked a sense of disturbing deja vu in China reminiscent of the Wuhan outbreak. But unlike last time when containment was the prerequisite, this time, the number of variables which determine the course back to normalcy (or at least a version of it) are multifold.
The biggest variable staring us in the face (don’t say it!) is the War in Ukraine. Global supply chains, which have been hamstrung for so long, are facing new levels of handicap with the unsparing sanctions on Russia and energy deficits consequent therefrom.
Also, unlike in the beginning of 2020, national economies now are sitting on overheated territories and primed with stagflation fears that emerged post-pandemic. With multiple calls to implement rate hikes and monetary tightening measures, global growth engines run the risk of skidding off the recovery runway. Under these conditions, if China were to shut off economic activities, even partially, the impact on global supply chains would be untold.
Unfortunately, the rout has begun. Dongguan, a key manufacturing hub in Southern China has suspended operations in factories already. So have Langfang and Jilin, two other important cities. Hong Kong is shutting its beaches while Shenzhen, one of the worst-hit cities by the new wave, is a major tech hub where lockdown was imposed indefinitely on Sunday.
The Factory Floor of the World (so-called)
The entities hardest hit by these lockdowns aren’t just residents but also companies like Apple, Foxconn, BYD, Toyota and Volkswagen who have had to shut their plants abruptly. Not only that, but the hostility towards foreign investments, along with the hostility towards its homegrown tech companies by the Chinese government over the past year, has made the world wake up to the realisation that decoupling from the Chinese economy is not just a priority but rather a necessity in more ways than one.
To that effect, companies like Foxconn, Wistron, Pegatron, among others, were quick to shift a chunk of their manufacturing locales out of China. Even companies like Apple who have shown a historic preoccupation with Chinese manufacturing operations, are beginning to move away too, however slowly. Apple has increased iPhone assembling capacities considerably overseas, especially in India.
And to be honest, it doesn’t seem like China minds that much. To foreign investors, it may be an uninvestable destination owing to abrupt pandemic-induced halts or regulatory crackdown on its biggest companies. It may also come in the line of fire as far as the next round of global sanctions are concerned owing to its political association with Russia. But neither the Chinese regulators nor the government seem perturbed by the ongoing market volatility and capital erosion.
In fact, while foreign investors (mostly US-listed institutional players) have been selling assets left and right (from $1.1trn a year ago to $750bn now), Chinese investors are evidently buying the dip. This indicates that when the dust settles, Chinese markets will be more domestic-owned and retail-driven.
It also explains how Xi Jinping’s pivot towards “focusing on the real economy” is detached from the performance of indices like CSI 300 or Hang Seng. The government has offered a myriad of policy incentives lately in the form of tax cuts and rebates (in the amount of nearly $400bn) to facilitate the growth of small and medium enterprises and manufacturers. So, clearly, securing foreign capital inflows through stock market validation isn’t a priority for China at the moment.
How Far is Too Far?
China is a classic model of post-Soviet authoritarian capitalism which has operated successfully so far through a mix of global investor participation and controlled domestic protectionism. But in the new world order that has come to shape itself more on the lines of political alliances, the Autocratic Axis powers like China and Russia cannot afford to do business in complete global isolation and sustain domestic growth at the same time.
China may not care much about investors fleeing the country but it definitely cares about its trade with the world. Its export revenues and cross-border remittances contribute greatly to its GDP. So, even if selling Chinese investments won’t change Beijing’s mind, convincing foreign companies to stop buying Chinese goods and services definitely will. That would be a death-knell to its precious real economy which can’t sustain without overseas receipts.
In many ways, including the ones mentioned above, the world has begun to work around China. Take TSMC, for instance. After causing an epic shortage of semiconductor supply last year, the company now holds double the stock piles of raw materials than it did five years ago. More and more banks are branding Chinese stocks as uninvestable. Western regulatory bodies, like the SEC, are kicking Chinese companies out of the bourses too when non-compliant with audit requirements.
Seems like if China can’t learn to live without the pandemic, then the world should really learn to live without China.
(Originally published March 16th 2022 in the TRANSFIN E-O-D Newsletter)
