The writer is chief economist at the Bank of Singapore
How long will China maintain its zero Covid policy? Beijing’s pick is one of the biggest wild cards for 2022.
The consensus is that China’s stance will soften after the Winter Olympics in February. This would stimulate consumption and stabilize the economy after its sharp slowdown last year. But Beijing is more likely to maintain its current strategy of strict lockdown and border closures until the end of 2022. Tight controls in China will therefore continue to influence financial markets around the world.
To understand why, consider China’s calendar of major events. This year, the lunar holidays fall at the beginning of February. Beijing will then host the Winter Olympics ahead of the convening of the National People’s Congress the following month. If the Omicron outbreaks have subsided by the end of March, the government will have a clear window to relax pandemic measures and reopen the country to the outside world.
Reducing restrictions so soon would support Beijing’s efforts to revive the economy. China experienced a V-shaped rebound last year with gross domestic product likely to have risen nearly 8% in 2021. But since the summer, growth has slowed sharply. Domestic consumption has been hit by strict shutdowns to contain new cases of Covid-19. Industrial production suffered from power cuts. Real estate investment has been hampered by regulatory restrictions on property developers, and infrastructure investment has been constrained by slow local government borrowing.
In December, the People’s Bank of China responded by reducing the reserve requirements of commercial banks to free up liquidity. The benchmark prime rate for one-year loans fell for the first time in nearly two years, and the government’s Central Economic Labor Conference has pledged increased budget support. An early end to China’s zero Covid policy would help further stimulate activity now, giving the economy a good chance of growing at its annual trend rate of 5.5% in 2022.
But Beijing is unlikely to abandon its strategy after the National People’s Congress in March. Instead, China is expected to maintain its position until the 20th National Party Congress is held in November.
This last congress is a key stage in China, which is held every five years. This year’s event will be particularly significant as it will confirm whether President Xi Jinping will serve a third term.
It would then be surprising if Beijing could ease its policy before November. His strategy has maintained an impressive death toll, but reduced exposure is likely to have limited immunity among the Chinese population. In addition, the variant of the Omicron coronavirus could test the effectiveness of Chinese vaccines against Covid. If Beijing abandons its strategy in the coming months, it could lead to widespread epidemics of Covid ahead of the National Party Congress.
So, investors should be prepared for strict closures and border closures in China throughout the year. The consequences for global markets are likely to be significant.
First, consumption should remain moderate in China. The country’s GDP growth could fall below its trend rate in 2022, limiting demand for raw materials. The absence of Chinese travelers overseas would also continue to affect tourism-dependent economies in the Asia-Pacific region.
Second, China’s trade surplus would likely remain at record levels in favor of the renminbi. During the pandemic, China’s exports were driven by strong overseas demand while imports were held back by a slowdown in domestic consumption. In 2022, emerging economies are expected to face a stronger dollar as the Federal Reserve ends quantitative easing and considers raising interest rates to counter inflation. But the renminbi, supported by China’s external surpluses, is expected to remain stable against the greenback.
Third, recycling China’s record trade surpluses should help keep global bond yields low. This will be particularly important for stocks in 2022.
Stock markets have soared during the pandemic, with yields remaining at historically low levels. But investors are now worried that bond markets could plunge if inflation doesn’t recede. Paradoxically, Beijing’s zero Covid strategy can benefit at-risk assets here. By limiting consumption and imports and keeping trade surpluses high, China’s lockdown position will allow its financial institutions to continue buying U.S. Treasuries, lowering government bond yields abroad. .
Some investors are hoping for a quick exit from strict virus controls in China. But global markets could perform surprisingly better if officials don’t make any changes before the end of the year.
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