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Macroscope | Why investors should be wary of narrative of China’s economic doom

  • As China moves away from its ‘zero-Covid’ policy, there is now a shift in narrative suggesting the move will also hurt prospects for its economy
  • This narrative ignores the many policy levers at Beijing’s disposal and assumes Beijing is not thinking through the change even though it has latecomer advantage

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A masked worker looks out from a restaurant as its entrance door displays a health check QR code on December 12. China will drop a travel tracing requirement as part of an uncertain exit from its strict “zero-Covid” policies that have elicited widespread dissatisfaction. Photo: AP

“What Happens in China Does Not Stay in China”. That is the title of a discussion paper published under the auspices of the US Federal Reserve last month. It’s a concept investors should bear in mind as China enters a new phase in handling Covid-19.

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Put simply, China’s economy is just too big to ignore. Admittedly, investors looking at China’s economic prospects right now might be forgiven for being a trifle confused.
While Beijing’s rigid adherence to its “zero-Covid” policy certainly impeded economic activity in China, there is now a shift in narrative towards suggestions that Beijing’s decision to move away from that same policy will also impair prospects for the Chinese economy as the country experiences a surge of new Omicron variant cases. It would appear that Beijing cannot do right for doing wrong.

Investors might conclude that the line of least risk is to look away until the outlook for the Chinese economy becomes clearer, but looking away is not really an option. The Fed-published discussion paper made the point concisely: “Spillovers from China reverberate through the global financial system through sentiment effects due to its importance as a driver of global business activity.”

One good example of this is the automobile industry. The discussion paper notes that in 2021, “China accounted for about 40 per cent of global vehicle sales, almost double the size of those in the United States.” With that level of market domination, it should come as no surprise that consumer retrenchment in China, linked to the “zero-Covid” policy, has a global spillover effect.

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Alarm bells must therefore have rung in automobile industry boardrooms last week when the China Passenger Car Association revealed that sales of passenger vehicles fell 9.5 per cent year on year in November to 1.67 million units, their first decline since May.

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