Mass testing has begun in the populous district of Chaoyang, Beijing, which reported 26 covid cases over the weekend. Beijing’s residents are stocking up on essentials in anticipation of a possible lockdown of China’s capital, which has sparked panic-buying in supermarkets.
Last Friday, Shanghai tightened restrictions, which included the forced evacuation of people from their homes to allow for the disinfection of buildings, as well as the installation of electronic door alarms to prevent those infected from leaving their homes. Green fences are being erected around buildings – part of the ‘hard quarantine’ measures introduced over the weekend. The measures in China are draconian.
It is difficult to watch the numerous videos coming out of Shanghai without thinking that the Communist Party of China is about to face its most difficult test yet. The censorship of the “Voices of April” video has been met with an eruption of protests on the internet. The video features short audio clips of residents talking about their experiences of lockdown. But censors have stepped in quickly to take down the film, sparking outcry. Even the first few lines of the Chinese national anthem – “Stand up! Those who refuse to be slaves!” – have been censored.
Outflows from renminbi-denominated debt and Chinese shares have accelerated. Investors are increasingly self-sanctioning their exposure to China for political reasons.
These lockdowns will be negative for equities globally. The S&P 500 could drop further: we retain our target of 4,000, for now. The effects of severe lockdowns are by now well known: more supply chain disruption and inflation. Reopening factories in China will not be straightforward either, and will take longer-than-expected, as manufacturers are faced with component shortages and logistics snarls.
China’s growth will slow dramatically: a severe economic crisis looms. The property downturn is worsening. But the PBoC has eschewed the dramatic rate cuts that Western Central Banks were eventually forced to adopt following the housing bust of 07/08. This could be a big policy mistake. Eventually, the PBoC will be forced to copy the Fed and the BoE’s response to the 07/08 housing crash, slashing rates. House prices in the secondary market are already declining y/y (-0.90% in March).
Strict covid lockdowns have worsened the shortages of fertiliser, labour, and other agricultural inputs. A drop in output across important agricultural provinces could force Beijing to ramp up food imports in its bid to secure adequate supplies, exacerbating the food price spike. One Beijing-based advisor to the central government on agriculture recently warned China is “facing food shortages”.
