Why China's COVID policies are rattling investors again

Why China’s COVID policies are rattling investors again

Investors in China-related assets who had expected a significant easing of COVID restrictions were disappointed this week as the country battles the worst wave of cases since the outbreak in Shanghai earlier this year.

China-related ETFs fell this week, with shares of the iShares MSCI China MCHI ETF,
lose 3.4%. The KraneShares CSI China internet ETF KWEB,
which offers concentrated exposure to China-based companies whose businesses focus on internet-related technology, lost 7.4% for the week, according to Dow Jones Market Data.

iShares China Large-Cap ETF FXI,
which provides exposure to large companies in China by tracking the FTSE China 50 XIN9X000 index,
recorded a weekly loss of 2.9%. Meanwhile, shares of SPDR S&P China ETF GXC,
recorded a weekly loss of 3.2%, while the Xtrackers Harvest CSI 300 China ETF ASHR,
fell 2.3% for the week, according to data from the Dow Jones Market.

See: As COVID cases rise, China locks down despite criticism

Earlier this month, investors cheered when the Chinese government announced changes to its “zero-COVID” policy, which relies on mass testing and quarantines to stem outbreaks. The move raised a glimmer of hope that the government was considering easing its draconian pandemic restrictions.

For example, the government has reduced the time international travelers entering the country must spend in quarantine, and airlines will no longer face suspended flights if they carry COVID-positive passengers. The same shortened quarantine period also applies to local people who are identified as “close contacts” with known or suspected positive COVID cases. Mass testing is also prohibited unless it is unclear how infections spread in an area.

However, as the country reported a record number of daily COVID infections on Thursday, cities like Beijing and Guangzhou again locked down apartment complexes, forcing residents to leave for at least a few days.

City governments have yet to announce citywide shutdowns, and it’s unclear how many people are affected at the city level. Beijing has 21.6 million people, while Guangzhou, a major transportation hub in the south, has nearly 19 million people.

Oil futures fell sharply, with the US benchmark CL.1,
down nearly 12% so far in November. The selloff was blamed in part on fears that continued restrictions are keeping a ceiling on demand for crude from one of the world’s biggest energy consumers.

Lily: China cuts bank reserve requirements as foreclosure fears spark panic in Beijing

China’s central bank on Friday slashed its requirements for the amount of deposits local banks must set aside for the credit they extend, increasing lending to households and businesses and trying to boost the world’s second-largest economy in defiance of a global trend towards monetary tightening.

“Ultimately, authorities will have to accept a much higher level of COVID cases while trying to reopen the economy, especially in the run-up to the all-important Chinese New Year which is in January 2023 – much earlier than previous years,” wrote Sean Darby, global equity strategist at Jefferies.

Darby thinks Chinese banks have a lot of cash on hand because consumers are simply not spending. This latest move by the PBOC to reduce its reserve requirements was intended to “demonstrate that there is little to stop banks from lending,” Darby said in a Friday note.

U.S.-listed Chinese stocks fell on Friday with the Nasdaq Golden Dragon China Index down 3.3%. Internet stocks including Alibaba BABA,
Baidu BIDU,
JD.com JD,
and NetEase NTES,
have fallen by more than 3% each and have lost at least 30% so far in 2022.

The broader US stock market was little affected this week by COVID developments in China, with three major indices ending the shortened week with gains. The S&P 500 SPX,
was up 1.5% for the week, while the Dow Jones Industrial Average DJIA,
recorded a weekly gain of 1.8% and the Nasdaq Composite COMP,
rose 0.7%, according to data from the Dow Jones Market.

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