Hong Kong stocks sold off suddenly in afternoon trade, despite the announcement that China will substantially loosen its strict Covid-19 rules by allowing asymptomatic patients to serve out their quarantine at home. China released disappointing trade figures earlier in the day that demonstrate the extent of the country's economic slowdown due to Covid disruptions, waning global demand, and poor consumer confidence.
The National Health Commission of China on Wednesday issued an 11-point notice that indicates mainland China is becoming more tolerant of Covid outbreaks. The notice states nucleic-acid testing should only be carried out for high-risk professions such as medical staff and couriers. PCR tests will no longer be required for most venues, other than higher-priority locations such as nursing homes and schools.
The most-remarkable shift is that close contacts of Covid cases can quarantine at home for five days, and even asymptomatic infected people and mild cases of Covid can normally sit the disease out at home. China will still enforce lockdowns but it will attempt "quick closure and quick release" of high-risk areas. That would be a marked contrast to the approach this spring in Shanghai, China's largest city, which was locked tightly down virtually citywide for two months, leaving some residents complaining they did not have food or medicine.
China has previously required all Covid cases as well as many close contacts of patients to enter centralized quarantine in a bare-bones government facility. As a result, citizens have become scared not so much of the virus but of the response they face from local officials should they be linked to a case.
Local officials in cities such as Shanghai, under great pressure to stamp out cases, have sometimes erected barriers to make sure citizens did not leave their residential compounds. Today's notice says it is "strictly forbidden to block fire exits, unit doors, and community doors" so that the public can get medical treatment or escape emergencies.
The Hong Kong market opened slightly lower but in line with a broad nudge into the red for most Asian indexes. With the Topix broad-market index in Tokyo essentially flat, down just 0.1%, the declines were smaller than those seen on Wall Street overnight.
In Australia, the S&P/ASX 200 index declined 0.9% on Wednesday, the poorest performance in Asia prior to Hong Kong's turn for the worse. The central Reserve Bank of Australia on Tuesday raised interest rates by 25 basis points. That takes the cash-rate target to 3.1%, its highest level in a decade. The RBA has hiked by 300 basis points this year, in a bid to ward off inflation that it predicts will peak around 8% for the December quarter.
However, the Hang Seng benchmark in Hong Kong plunged in post-lunch trade, with the index ending the day down 3.2%. Hong Kong, the worst performing major stock market in 2021, has seen exceptional volatility in Q4 as investors attempt to front-run China's opening up.
Since government policy is made without public input behind closed doors, rumors of the thinking of the central government have driven wild swings. The Hang Seng is still up 28.1% since the end of October, when an anonymous text message said Beijing had set up a committee to investigate opening up.
The CSI 300 index of the largest mainland Chinese stocks dipped only 0.3% on Wednesday, a far tamer performance than in Hong Kong. Hong Kong's overseas-listed property developers led the losses, with China's largest homebuilder, Country Garden HK:2007 and (CTRYY) , down an index-leading 15.5%. The company said today that it will raise HK$4.8 billion (US$617 million) by offering shares equivalent to 6.9% of its capital at HK$2.70, a 17.4% discount to Tuesday's close. Its shares finished at HK$2.68 as a result of its second such move within a month.
Other credit-starved developers may also seek to raise cash at a cut-price rate for shares, following November's rally. The woes of the beleaguered property industry have caused even leading developers to behave like penny stocks. Rival Longfor Group HK:0960 and (LGFRY) lost 12.1%, Country Garden's property-management spinoff CG Services HK:6098 fell 10.5% and China Overseas Land & Investment HK:0688 and (CAOVY) fell 6.2%.
China's National Health Commission notice today is intended to "optimize and improve prevention and control measures according to the time and situation." The commission introduced 10 new "targeted measures" on top of 20 previously announced optimized measures, in this the 9th edition of China's anti-Covid protocols.
As you can tell, there's a fixation with quantifying the response when it's becoming increasingly clear that a "dynamic zero Covid" policy means "We're making it up as we go along." There are national, provincial and city-level rules that, while complex and frequently changing, appear to now be showing a tolerance to "live with Covid" like the rest of the world.
This latest notice notes that the "pathogenicity of the Omicron mutant strain is significantly weakened." We have seen a change in tune from officials ever since demonstrations broke out in dozens of locations across China, venting frustration at the harsh zero-Covid policies. Both officials and government-run media have in the past few days begun stating that Covid has become less virulent, contradicting previous statements but providing cover for the change in policy.
It certainly appears that zero-Covid is unofficially over. The intention may no longer be to reduce every Covid outbreak back to zero cases through harsh lockdowns and daily testing of the population. There's no admission yet from the Beijing leadership that Covid may be here to stay, but that's the subtext. Zero-Covid had already been adjusted to be "dynamic," involving more-targeted neighborhood-level lockdowns. But a handful of suspected cases was enough to shut down a residential compound or disrupt production at a factory.
We can see the impact on China's trade figures today. Exports fell 8.7% year-on-year for November, more than double the 3.9% decline anticipated by economists. Imports were even weaker, down 10.6%, exceeding the forecast of a 7.1% drop.
Reflecting production issues such as the unrest at the Foxconn Technology TW:2354 factory complex in Zhengzhou, Chinese shipments of mobile phones plummeted by 33.3%, compared with growth of 7.0% the prior month. That Chinese imports are suffering more than exports suggests demand is still stronger abroad than at home. Anecdotally, my contacts tell me the Chinese economy on the ground is in a dire state.
"Clearly, exports have become a notable drag on growth," Nomura's China economics team says in a note to clients, predicting GDP growth of only 2.4% for Q4.
The pace of withdrawal of Chinese restrictions this week has surprised just about everyone. Chinese President Xi Jinping was continuing to reassert just how import zero-Covid was when he won reelection to a third term as leader of the Chinese Communist Party in October. The scale of the Covid-rule demonstrations, with some protestors going so far as to call for Xi to resign, clearly rattled the Communist top brass, in a way that deteriorating economic figures did not.
Easing Covid rules will make everyday life easier and boost output numbers - but at a cost in human disease. Nomura's team caution that the road to final reopening will likely be "gradual, painful and bumpy, as China does not appear well-prepared for a massive wave of Covid infections."
It will not be an easy path ahead. China has not allowed the use of any overseas-made vaccines, and research in Hong Kong showed that three doses of the Chinese-made vaccines are needed to provide a similar level of coverage as foreign-made mRNA vaccines. All the Chinese vaccines are "old-fashioned" vaccines made from dead or denatured virus cells.
There is also very little natural immunity to Covid-19, since China has been so intent on eliminating every outbreak. And since Covid was not widespread, many Chinese citizens have resisted getting vaccinated, with the concern that vaccine hesitancy among older people in particular putting them at risk.
Estimates vary as to how many Chinese citizens might die if there is a widespread outbreak. The head of the Center for Disease Control in southwestern Guangxi region, Zhou Jiatong, estimates that China would experience 233 million infections and at least two million deaths if it follows the more-open Covid response in Hong Kong. Should China experience a similar death rate to the United States in its own outbreak, more than four million of China's 1.4 billion people would likely die.
Officially there have been only 5,235 deaths from Covid in China, while almost double that number, 10,842 people, have died in Hong Kong, which has a population of just 7.3 million. Although it at one point had a 21-day quarantine after international travel, Hong Kong has never enforced a full lockdown of the city, and has kept venues such as restaurants open throughout.
It will be a test of China's healthcare system and top-down command to see if the country can transition from highly restrictive zero-Covid policies to greater tolerance of the virus. With the Lunar New Year coming early next year, on January 22, these next few weeks will be a critical phase in handling the disease.