Shanghai ends lockdown: formal reopening fails to impress stock traders as path to economic recovery remains unclear

  • The Shanghai Composite Index fell 0.1 per cent on Wednesday, reflecting investors’ apathy
  • The Shanghai exchange has lost some of its edge against Shenzhen, which now accounts for over half of the combined average trading volume on the two bourses

Stock traders were unenthused by the lifting of the two-month lockdown in Shanghai, as they want policymakers to do more to revitalise the economy roiled by the pandemic.

While people went about their normal activities and workers returned to offices and factories following the city’s reopening, unimpressed stock investors sat on the sidelines looking for signs of a pickup in economic activity.

The benchmark Shanghai Composite Index closed 0.1 per cent lower on Wednesday, reflecting investors’ apathy.

China will need to take more action throughout the year to revive its economy, which investment banks including JPMorgan Chase have predicted will contract this quarter. Stimulus packages unveiled so far – cuts in the reserve requirement ratio and subsidies to small businesses – are not enough to spur growth across the board, economists said.

“The damage to consumer confidence is already done,” said Wang Qi, chief investment officer at MTI Management in Hong Kong. “The biggest economic challenge is not supply but demand.”

The two-month lockdown in Shanghai has dealt a severe blow to the city’s 2.67 million businesses, from corner street shops to multinational manufacturers, raising the possibility of an increase in the unemployment rate.

The effect of the lockdown also extended to the neighbouring city of Kunshan, a hub for Taiwanese-backed chipmaking factories, which had to shut production because of either infections or logistic snarls.

Beijing’s steadfast adherence to the zero-Covid approach will probably spook more consumers who are likely to further tighten their belts amid a bleak economic outlook.

The lockdown is also undercutting Shanghai’s goal of becoming a global financial centre. In its competition with the Shenzhen Stock Exchange, the local bourse has lost some of its edge.

The Shenzhen exchange now accounts for more than half of the combined average trading volume on the two bourses and it is steadily closing the gap with Shanghai on market cap.

Still, the Shanghai Composite has so far avoided a crash, falling 0.9 per cent since the lockdown was enacted on March 28, thanks to the pro-growth measures from Beijing to cushion a slowdown in growth.

Property developers and energy producers have remained the few sectors that have gained in the span, benefiting from the policy support and rising global commodity prices.

While the market has almost reached a consensus that the worst of the Covid-19 resurgence is over, the key question for investors is whether all the headwinds from the economy and corporate earnings have been priced in.

The Shanghai Composite dropped to a low of 11.7 times earnings in the sell-off, almost matching the nadir of 11.6 times at the height of the US-China trade war in 2018.

“For corporate earnings, we expect A shares to again report negative earnings growth on a year-on-year basis in the second quarter and they could hit a trough for the year,” said Meng Lei, a strategist at UBS Group in Shanghai.

“There could be more earnings downgrades. Opportunity will emerge once the current round of earnings downgrade is largely done.”

Author: Zhang Shidong, SCMP

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