Recently, however, the Chinese government announced its “20 COVID Policy Optimization Measures”, which fueled a strong recovery in the Chinese market.
The strict “zero COVID” policy has been one of the main factors hampering China’s growth recovery this year. Recently, however, the Chinese government announced its “20 COVID Policy Optimization Measures”, which fueled a strong recovery in the Chinese market. Although these measures do not portend an immediate reopening, they may mark the beginning of the end of tedious confinements.
In the first week of November, speculation over the easing of China’s strict COVID policies sparked a dramatic 13% rise in the MSCI China. The official announcement of the ensuing “20 COVID Policy Optimization Measures,” measures addressing pain points in China’s COVID policy and promoting actions that will likely lead to a full reopening, immediately sent stocks moving. Chinese stocks in bullish territory.
The market’s euphoric reaction is not surprising. The new, highly infectious strains have made China’s once effective “zero COVID” policy extremely expensive to maintain. Frequent lockdowns have not only discouraged consumer activity (air passenger traffic, for example, has yet to pick up), but has also limited the impact of stimulus measures on infrastructure investment, compounding thus the real estate recession.
Phasing out the restrictions would pave the way for more effective fiscal stimulus, which would further restore market confidence. Yet, there are still challenges to overcome:
- New vaccines must be developed and vaccination rates must increase significantly.
- The number of cases is already high and the loosening of COVID restrictions might lead to another spike in infections.
- Implementation risks remain, as local governments often apply stricter restrictions than those recommended by national guidelines.
China’s latest move to reconnect with the world is hugely positive for growth. As always, however, investors should watch developments with caution, as the faithful execution of the reopening plan will be key to the investment outlook.