Chinese shares took a hammering here on Monday as Beijing residents stripped grocery stores of vegetables in panic buying as they prepared for a potential Covid lockdown of the Chinese capital.
The CSI 300 index of the largest mainland shares plunged 4.9% to its lowest level in two years. That means Chinese stocks have lost one-fifth of their value this year alone, down 22.4% in 2022.
Certain neighborhoods of Chaoyang District in Beijing have already been shut down, while all 3.5 million residents of the district - home to many of the embassies in the Chinese capital - must undergo Covid testing. There will be three rounds: today, Wednesday and Friday. That's after several COVID cases were detected among students and teachers at a middle school. Including relatives, the school has led to 1,230 close contacts being quarantined.
Beijing today reported 19 new Covid cases over the prior 24 hours, adding to 22 cases reported on Sunday and eight on Saturday. Before this weekend, Beijing had at most a couple new Covid cases per day.
It is a sign of the state of China's zero-Covid stance, or ZCS, that residents are scared not of the virus itself but of the response from officials. Local Communist Party representatives are rated on how effective their district is at keeping the virus out, incentivizing harsh measures that come at a cost to the economy.
"We believe the worst is yet to come," particularly in terms of the impact on financial assets, Ting Lu, the chief China economist at Nomura, and his team say in a brief to clients. "Global markets have been playing catch-up in recognizing the severe consequences of China's ZCS."
While total infections are a smidge of a fraction of a percent for Beijing, with a population of 21.9 million, the fear is that they are headed in the direction of Shanghai. which is entering its fifth week of shutdown for its 27.1 million people. Shanghai entered what was supposed to be a two-stage lockdown on March 28, with half the city shut down at a time for mass testing, but the entire city was shuttered on April 5.
There are instances in Shanghai of officials using "Big White" scarecrows - dressing dummies in the white hazmat suits that health workers, officials and the police wear while conducting their duties in areas with infections. The idea of the scarecrows is to increase compliance with stay-at-home orders among a population that is increasingly frustrated with the length of the lockdown.
Over the weekend in Shanghai, two-meter-tall green-painted iron fences began appearing suddenly outside buildings where there have been positive Covid cases. The fences seal residents inside at buildings that do not already have their own walled compound. Main gates have sometimes been chained.
A notice dated April 23 at one of the fenced-in sites said the local authority is imposing a "hard quarantine."
Shanghai is accounting for by far the majority of cases across China, reporting 19,455 new cases as of today. Infections are no longer rising exponentially but are consistently testing the 20,000 mark each day.
Deaths are also on the rise, with Shanghai today reporting a record 51 mortalities, for a total of 135 in the last week. Health experts note that China has strict standards for what counts as a Covid-caused death, frequently recording other causes such as pneumonia if the person in question had not tested positive, and citing a pre-existing condition as the cause even when Covid has contributed to a death.
The Chinese yuan fell 1.0% against the U.S. dollar on Monday, by far the weakest Asian currency against the greenback. The heavily managed Chinese currency has seen its U.S. dollar exchange rate shoot up from C¥6.56 a week ago to C¥6.37 today. That's a 3.1% change.
If China's most-populous two cities enter lockdown, the situation places a huge burden on the economy, with workers unable to commute or needing to live at their place of work in a Covid bubble. It also suggests that large swathes of China may enter the same state. Other countries have found the Omicron variant less deadly and more infectious, making it very hard to control.
In nations where vaccination rates have been high, Omicron has become a manageable disease with relatively few hospitalizations and deaths. The concern is that China's vaccines have not proved as effective as the mRNA-based Pfizer (PFE) and Moderna (MRNA) shots. But presumably for nationalistic rather than health concerns, China has refused to approve any foreign-made vaccine. Its vaccination rate is also poor among elderly citizens, so a widespread Omicron outbreak could be disastrous.
GDP impact expected
Nomura last week downgraded its forecast for second-quarter growth in China to 1.8%, causing full-year expansion to decline to 3.9%. "We view this as still too optimistic and expect another round of forecast cuts towards our current numbers," Lu and his crew say.
There are now 46 cities in China with a full or partial lockdown in place, with stringent restrictions on mobility. Nomura estimates the number of people affected has declined slightly to 343.5 million residents, down from 356.5 million last week, with the current restrictions covering parts of the country that account for 35% of the economy.
The current Covid case count is highest in Shanghai as well as in Jilin Province, in China's far northeast next to Russia and North Korea. The rise in the small number of cases in Beijing is causing concern not only because the country's second-largest city could shut down without restrictions yet being eased significantly in Shanghai, but also because it's a sure bet other cities subsequently will enter the same situation.
Besides Beijing, the cities of Hangzhou, Harbin and Nanchang have ramped up lockdowns over the last week, while Foshan, Nanjing and Wuhan have been relaxing measures. But the iron fences put up in Shanghai show that while the city is easing lockdown by allowing residents in certain districts to leave their homes and residential complexes, movement across the city is heavily restricted.
Chinese officials have reiterated the position that the country cannot abandon its zero-Covid stance. Chinese President Xi Jinping is seeking a third term at an important once-in-five-years congress this fall and had hoped to be able to champion victory over the virus.
The current outbreaks are a significant challenge for the leadership. It's a sign that things are going badly that Xi is completely absent today from the front page of the Global Times, the publication used to broadcast China's foreign policy stance. He's also absent from the headlines on the China Daily, one of the major domestic newspapers, when in ordinary times we're fed numerous updates on Xi's latest initiatives. Perhaps fearful of the outcome, Xi has largely delegated the virus response to Premier Li Keqiang.
Shanghai and Beijing alone account for 7.3% of China's economy. The effects of lockdowns are being felt nationwide, however, with indicators such as subway travel in eight major cities down 47% year on year, movie box office declining 77.5% and Baidu's (BIDU) mobility index nationwide down 42.4%.
Those effects, just a sampling of the hit to the economy, will continue feeding through over the course of this year. It's unclear if China can conquer Covid once again or when lockdowns and the zero-Covid stance will ease.