As China’s infections rise, economic prospects take another hit and stock sell-off worsens

  • Beijing scrambles to contain the worst outbreak China has seen since Wuhan in early 2020, as daily infections surpass 5,000
  • Lockdowns in coastal cities, including the first imposed on Shenzhen, prompt warning that situation has ‘deteriorated at an alarming pace’, with big economic hit expected

Despite China reporting upbeat economic data to start the year, a severe wave of coronavirus infections has added fuel to scepticism over the pace and effectiveness of its monetary-loosening plans.

The nation is battling its worst outbreak since what was seen in Wuhan in early 2020, and the National Health Commission reported 5,154 infections on Tuesday, including 1,647 asymptomatic cases.

Infections more than doubled from 2,125 a day earlier and brought the total caseload to more than 15,000 since March 1, across 28 provinces. The northeastern province of Jilin is the epicentre of the latest wave.

Beijing’s scramble to contain the virus in coastal cities, with a strict lockdown imposed for the first time on the southern technology hub of Shenzhen, has lowered market expectations for a quick recovery of consumption and serves as the latest reason for China watchers to doubt the country’s ambitious economic growth target this year.

The weak sentiment, driven by factors such as the Russia-Ukraine war and tensions between Beijing and Washington, has also led to massive capital flight and the biggest drop in years in the benchmark CSI 300 index of large Shanghai- and Shenzhen-listed shares.

“The Covid situation in China has deteriorated at an alarming pace over the past week … China’s economy could be severely hit again,” said Nomura’s chief China economist, Lu Ting.

“We believe China’s ‘around 5.5 per cent’ [gross domestic product] growth target this year is becoming increasingly unrealistic,” Lu added, calling the market consensus forecasts of 5.2 per cent “too optimistic”, while maintaining Nomura’s forecast of 4.3 per cent.

China has seen a strong recovery in three growth drivers – retail sales during January and February grew by 6.8 per cent, year on year; fixed-asset-investment growth accelerated by 12.2 per cent from last year’s 4.9 per cent; and industrial production grew by 7.5 per cent, up from 4.3 per cent growth in December.

Statistics bureau spokesman Fu Linghui admitted that the worsening virus situation will affect local economic recoveries, but insisted that the national economy is genuinely recovering.

“China has gained rich experience in pandemic control. The set of measures taken are able to cut the spread of the pandemic, and the impact on the economy will be gradually controlled,” he said.

The just-released data did not reflect the recent Covid-19 lockdowns, which are set to squeeze consumption of goods and contact-intensive services.

Beijing’s optimism, however, has not mitigated the market sell-off, which worsened in recent days amid the war, China-US tensions and the potential delisting of overseas floated Chinese stocks.

Overseas holdings of Chinese bonds fell by 80 billion yuan (US$12.6 billion) in February, while investors were also retreating from the A-share market, with 51.5 billion yuan worth of outflows through mainland-Hong Kong Stock Connect channels in the past month.

Data provider Wind showed a heavy sell-off by foreign investors via the Stock Connect programme, as outflows continued for the seventh consecutive day on Tuesday, with the daily net flow hitting a record high for this year, at 16 billion yuan.

The benchmark CSI 300 index dropped 4.57 per cent on Tuesday, and it has fallen 20 per cent since the start of this year.

The disruption of production and business activities is unfolding in key economic cities.

Shenzhen, home to tech giants such as Huawei Technologies, Tencent, drone maker DJI and Foxconn factories that produce Apple products, has entered a de facto lockdown with mass testing and movement restrictions this week.

International flights to Shanghai, the country’s financial hub, have also been diverted as the municipal government remains preoccupied with curbing the spread of the highly contagious virus.

Joerg Wuttke, president of the European Union Chamber of Commerce in China, flagged disruptions to local operations of foreign companies, warning of “erratic company closures, widespread lockdowns and inability to travel”.

“The impact is quite negative, and will go from bad to worse,” he said.

The capital, Beijing, has restricted incoming travel and announced on Monday the suspension of all after-school tutoring courses, after at least three schoolchildren caught the virus.

“The impact of recent lockdowns will likely be bigger than those during previous Covid flare-ups since the first quarter of 2020, with more significant disruptions in mechanical and electrical exports as well as services consumption,” Bank of America Merrill Lynch economist Helen Qiao said in a note on Tuesday.

Shenzhen and the neighbouring city of Dongguan are key producing regions of such products and accounted for about 13.3 per cent of the nation’s exports last year.

“As we do not expect the government to shift away from its Covid-zero approach soon, we may see significant downside risks on our [economic] growth forecast if Covid cases spread further, triggering harsher controls in more cities and regions,” the note added.

Beijing has expressed intentions to make its pandemic control measures more scientific and precise, and last week it approved rapid antigen tests for public use.

However, with confirmed cases on the rise, the central government on Friday re-emphasised its determination to enforce much stricter measures to wipe out the virus.

Health commission spokesman Mi Feng confirmed on Tuesday that the Omicron coronavirus wave had spread to 28 provinces, and said prevention is “difficult, complicated and severe”, while insisting that China’s zero-Covid policy has remained effective and should continue to be firmly implemented.

Julian Evans-Pritchard, senior China economist with Capital Economics, said: “This has the potential to be even more disruptive than the Delta wave last summer, which led to a sharp contraction in economic output.”

Wang Dan, chief economist at Hang Seng Bank China, warned that the cooling economic activities in coastal regions could send the country’s first-quarter economic growth into negative territory, and more forceful loosening policies should be deployed in the coming months to accomplish the full-year growth target.

“As seen from the 2020 episode, it should return to normal in one or two months,” Wang said. “But the psychological impact will be larger, particularly on small businesses, as the pandemic has entered its third year.”

Beijing’s policymakers should consider more spending by the government and state-owned enterprises, and more interest rate cuts, to keep the world’s second-largest economy well on track, she added.

To the market’s disappointment on Tuesday, the People’s Bank of China did not cut its medium-term lending facility policy rate and seven-day reverse repo, which many analysts attributed to the good economic numbers or the US Federal Reserve’s anticipated rate hike.

With the pandemic one of many headwinds ahead, there were also worrying signs in January-February data.

The property sector, an old growth driver, continued to contract, with the amount of floor space sold down 9.6 per cent and sales value down 19.3 per cent, compared with the same two-month period last year.

February’s new loans, totalling 1.23 trillion yuan, fell short of market expectations. Particularly, the household medium- and long-term loans, which are used as a proxy for mortgages, reported a rare fall by 45.9 billion yuan – a reflection of weak investment sentiment.

Also, the surveyed urban jobless rate for the January-February period expanded to 5.5 per cent in February from 5.3 in January and 5.1 per cent in December. The situation remains especially difficult for those aged 16-24, with their unemployment rate at 15.3 per cent.

Chinese authorities have relied more on their fiscal tools, with 2.5 trillion yuan worth of tax cuts under way to help hard-hit manufacturers and small businesses, plus more than 2 trillion yuan worth of off-budget fiscal capital to help fund infrastructure construction.

Infrastructure investment grew 8.1 per cent in the first two months, compared with a 0.4 per cent rise for all of 2021. Meanwhile, the number of newly started projects doubled from a year earlier, while their combined investment was up 62.8 per cent, according to government data.

Author: Frank Tang, SCMP

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