Weekly Brief: China’s At A Crossroads

Weekly Brief: China’s At A Crossroads

about 1 year ago3 mins

Mentioned in story

China’s at a crossroads when it comes to its Covid policy, and the dizzying news spinning out of the country lately has made it tough to tell which way it’ll turn.

🕰 Recap

  • Just weeks after Chinese authorities published a softer-touch Covid plan, a massive infection wave came along just to test it
  • But Chinese ecommerce firm Pinduoduo’s results on Monday reminded us that lockdown restrictions aren’t bad news for everyone
  • In the physical world, though, Chinese industry continues to buckle under Covid restriction pressures, data on Wednesday showed

✍️ Connecting The Dots

One thing’s for certain: despite China stubbornly sticking to its near three-year-old policy, Covid is anything but zeroed. The current wave ripping through the country is breaking daily infection records and around half of Chinese firms have reported cases this month, according to China’s Beige Book survey. But fed-up Chinese people have taken to the streets to publicly voice their discontent. And this rare showing of anger has the world watching the Chinese government's next moves with peeled eyes.

But this is where it gets a little messy. See, from the outside looking in, it appears as though the government’s unwilling to change its official Covid-zero stance. Yet, in certain parts of the country – like Guangzhou, where demonstrations have been intense – local authorities have announced relaxation measures. And, on Wednesday, China’s vice-premier had some encouraging words, saying the virus had entered a new – less toxic – phase.

Perhaps the best place to look for clues as to what’s going to happen next is the stock market, which, after all, is one giant forecasting machine. And if the 20% gain in the Hang Seng, Hong Kong’s leading stock index, in November is anything to go by, then perhaps China is finally on the path to a reopened future.

🥡 Takeaways

1. Everything’s connected.

The US stock market can’t make up its mind whether China’s reopening would be good news or bad news for American firms. And that’s certainly understandable. On the one hand, a full-blown reopening would give the sluggish global economy a much-needed boost. But inflation’s still simmering in the West, and a Chinese reopening could turn up the heat once again. On the other hand, it’s those lockdown-induced supply blockages that have caused a lot of today's spikey prices. So through rose-tinted glasses, having China up and running again might be good for demand and supply.

2. There may still be hope for a perfect landing.

Imagine for a second the following: China emerges slowly out of lockdowns just enough to stimulate demand and reopen supply chains, but not enough to cause inflation to boil over again. Western economies, meanwhile, have mild recessions, popping the lid back on inflation but avoiding serious damage to employment. Central banks around the world stop tightening, with interest rates back at healthy 3%-5% levels – after all, no one actually wanted to hold rates near zero for such a long time. See, what we have here is an almost perfect, but actually pretty conceivable, scenario. The point is this: sentiment in investing is fickle, so it's always a good idea to entertain the opposite of current conventional wisdom. Roll on summer 2023, perhaps.

🎯 Also On Our Radar

We were early to spot the brewing spat between Twitter and Apple, and now the Spotify CEO's thrown his two cents in by accusing Apple of “giving itself every advantage while at the same time stifling innovation and hurting customers.” Ouch. It might have been the building army of enemies, then, that prompted Tim Cook to invite Elon Musk for an HQ tour. Let’s see if that soothes the tensions.



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