(Tiper Stock Exchange) – The Chinese economy has had a difficult 2022due to two main headwinds: the collapse of the real estate sector and the covid-related restrictions, which weighed heavily on growth despite the support of monetary and fiscal policy from which the infrastructure sector mainly benefited. 2023 promises to be equally challenging, albeit for different reasons. The key factor is the overcoming the zero-covid policy. After performing well in the first two years of the pandemic, this policy has become increasingly unsustainable and costly to the Chinese economy due to the emergence of the highly contagious Omicron variant. In addition to the economic costs, the social costs have exploded, with the population tired of repeated and increasingly intrusive Covid restrictions. The authorities have therefore begun a process of reopening, which however could be chaotic and messy.
The starting point is shaky, as the measures to ease the restrictions announced in recent weeks they are faced with a situation where vaccination coverage is significantly lower than in other Asian countries. The recent efforts by the Chinese government to re-accelerate the vaccination campaign, especially among the elderly, will likely take time to have an effect and there are still questions about the effectiveness of current Chinese-made vaccines. Consequently, it is highly likely that the health system will come under severe pressure in the coming months, causing stress in some parts of Chinese society. Although daily data is no longer available, China’s National Health Commission estimated that at least 248 million people contracted the coronavirus in the first 20 days of December, nearly 20 percent of China’s entire population.
“China now appears to be shifting to an endemic approach to managing the virus,” commented Tom Wilson, Head of Emerging Market Equities at Schroders. “New domestically supplied vaccines support a new boost to vaccine penetration. transition to an endemic status will result in waves of exitbut will significantly reduce the risk of persistent macro pressure.”
In this scenario, between December 26 and 27 the Chinese government has removed quarantine requirements for inbound travelers effective January 8as well as reissuing passports and travel permits for Hong Kong. People arriving in China will only need to get negative Covid test results within 48 hours of departure, according to a National Health Commission document. This compares with the current eight-day isolation requirement: five days in a designated quarantine hotel or central facility, followed by three days at home.
Furthermore, the government has stated that will facilitate visa applications for foreigners who need to travel to China for whatever reason, from business and studies to family reunions, while outbound tourism, which has dwindled to almost zero during the pandemic, will resume in an orderly fashion. Current caps on the number of international flights between China and the rest of the world and passenger capacity will also be lifted, according to the statement. Finally, the government will also take over i fast checkpoints on the borders with Hong Kong and Macao on Jan. 8, the National Immigration Administration said.
However, this significant wave of easing of restrictions and reopenings risks having negative consequences in the rest of the world. The high number of new infections is in fact observed with great attention abroad, because according to some experts it could pay off the circulation of new variants is more probable.
However, the effects of this news on the markets, after the first rials coinciding with their announcement, are not yet easily decipherable, and it will be necessary to wait weeks or months to understand whether China will be effective in managing millions of new cases of coronavirus. “It’s still important to keep an eye on whether the health part can keep up and how reopening translates into key data for consumption and trade,” said Christina Woon, investment director for Asian equities at abrdn. “The road to full reopening is a bumpy one, as we’ve seen around the world.”
In addition, attention will need to be paid to monetary and fiscal stimulus initiatives in response to economic performance. “Any bad economic news can therefore become good news for the financial markets, the famous “bad news is good news” which works if there are the conditions to expect a stimulus, however something has already started to move – points out Marco Piersimoni, Senior Investment Manager at Pictet Asset Management – Economic data worsening are in fact interpreted as an opportunity for monetary and/or fiscal easing. And we know very well that China is an extremely sensitive market to stimulus measures”.
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