Thursday marks two years since the Covid-19 vaccination drive began, yet both the U.S. and the world economy continue to be dominated by issues created by the pandemic. The uncertainty is about to get worse, as China starts the joy, pain and eventual catharsis of reopening.
Markets have been betting on the short-term benefits of reopening since rumors of the policy change began. The renminbi has enjoyed its best five-week gain against the dollar since internationalization in 1994 and domestic stocks jumped about 10%.
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The danger is a repeat of the economic, financial and political swings that created a boom-bust cycle in the rest of the world. Stocks are back below where they stood when Margaret Keenan, a pensioner in Coventry, England, became the first to be officially vaccinated.
There are three reasons to think China’s economy may be less vulnerable to the troubles that hit the rest of the world. But that doesn’t make the country’s stocks the obvious bargain many think. Nor does it mean that China’s reopening won’t be disruptive to the rest of the world.
First, China hasn’t had the government stimulus that supported the post-lockdown rebounds in the U.S. and Europe and underpinned red-hot jobs markets and inflation. Its initial support package was small by comparison, at 5% of GDP against 26% in the U.S. by September 2021, according to the International Monetary Fund. Since then the government has steered clear of major stimulus.
Because households don’t have stimulus checks burning holes in their pockets, the rebound is likely to be less strong. This should make it easier for airlines, hotels and restaurants to meet higher demand. There is also been less of a boom in stuff bought by those working from home, meaning less need to rotate production capacity back out of exercise bikes and laptops than was seen in developed countries.
On top of that, the recovery in demand is unlikely to be sudden, as China is reopening more cautiously than elsewhere—not least because few people have immunity to the virus. As Covid spreads and hospitals fill up, consumers may stay cautious even if governments don’t reimpose lockdowns.
Second, and relatedly, China has plenty of spare capacity in the economy to expand services that do see a spike in demand, thanks to high youth unemployment and damage to small businesses. Global pressures will probably be less severe, too, as China’s reopening comes as growth in the rest of the world is slowing, which is likely to ease pressure on oil prices and other essential imports.
Third, there is unlikely to be a repeat of the U.S. experience of opting out of the workforce that worsened the shortage of people available to fill jobs.
“Because there’s been no checks in the mail and people have had to suffer in terms of their income it’s not easy for people to decide that they don’t want to come back to the labor force,” says Tao Wang, chief China economist at
Many investors have focused on China being unloved, which is usually a good sign. MSCI’s measure of domestic stocks trades at 12 times forecast 12-month earnings, against 18 times for the U.S., even after the recent gains. Foreign interest in Chinese shares bought through the Hong Kong Stock Connect program dropped sharply from August up to October, too.
Against that, the sheer scale of the unexpected swings in goods, services and asset prices experienced in the U.S. should make us wary of predictions for China’s recovery. Whether it was the slide in oil prices from briefly negative to above $120 a barrel, the quintupling and fall in shipping rates and lumber futures, or the bubble-that-popped in lossmaking technology stocks, these swings all came as a surprise.
Worse, China may deserve its discount to the U.S., much of which is caused not by concern about Covid policy but by fears about geopolitics, the lack of rule of law and the structural problem of its imploding housing developers.
While China’s valuations have fallen a lot, they are almost exactly in line with where they stood before the pandemic, as is the discount to the U.S.
On the face of it, the opening up of the world’s second-biggest economy is good for stocks everywhere, pushing up demand and removing restrictions on supply. But adding to global demand—especially in oil—makes it even harder for central banks elsewhere trying to cool their economies. China’s reopening may be less messy than the West’s, but has plenty of potential to disrupt.
Write to James Mackintosh at [email protected]
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