Shanghai residents are free!
I went to see The Soup Dragons play in Wilmington, N.C., back in my college days, and their lyrics for some reason spring to mind:
Don't be afraid of your freedom, the Scottish band urges. I'm free to do what I want, any old time.
Only Shanghai residents aren't free, really. Shanghainese citizens are simply able to breathe a little outdoor air, get a haircut, order takeaway from a restaurant, ride public transport, drive a car, go to work. They certainly can't do whatever they want, any what time.
The fact that curbs on movement remain in dozens of other major Chinese cities would explain the modest bounce in Chinese shares. It was on Monday that we learnt the 65 days of a Shanghai lockdown would end, a lockdown originally promised to run only nine days. The CSI 300 index of the largest stocks in Shanghai and Shenzhen is up 2.0% since Friday's close. The Shanghai Composite index is even less enthused, up 1.7% in the same timeframe. Both inched very slightly lower Wednesday.
What has changed as of Wednesday?
The 25 million citizens of Shanghai, bar the roughly 500,000 of them still under some sort of quarantine lockdown, can re-enter the kind of restrictive society that they once "enjoyed." Political speech and any criticism of China's Covid policy is quickly snuffed out online. Under President Xi Jinping, Chinese society has become even more authoritarian. Politics surpasses civil liberties every time.
They're afraid of their freedom.
I had to chuckle when watching an early social-media post showing people demonstrating outside their Shanghai housing complex on a rainy day. "We want to eat!" the leader of the demonstration shouted while shaking his fist, a refrain that came back loud and clear from the crowd. "We want to go to work!" was endorsed with the same vociferous response. "We want to have the right to know!" The chants petered out into the equivalent of "We want hmmm eerrrr yeah well."
Tencent Holdings (TCTZF) (HK:0700) censored the video from its WeChat platform, the Chinese equivalent of Twitter (TWTR) . It allowed other milder protest videos that didn't contain words like "Freedom" to remain, while declining to comment on its policies.
The Chinese Communist Party would always prefer its citizens to focus on making money, and their jobs, and not bother their little heads thinking complex political thoughts. Even at a time that China's staunch zero-Covid strategy resulted in one-third of its economy shutting down, the CCP would brook no questioning of the harshness of the measures, the wisdom of attempting to eliminate the highly infectious but less dangerous Omicron variant, the cost to physical and mental health that must be paid in that quest.
So Shanghai can go back to work. Many companies ceased production at the height of the restrictions, then attempted to form unpopular "closed-circle" bubbles in which workers were forced to live on site. Now, citizens can at least sleep and eat at home, provided they present their "green" code on their smartphone and a negative PCR test conducted within the last 72 hours.
Shanghai accounts for 7% of China's total US$17.5 trillion economy. But its influence is felt far and wide. It is mainland China's financial capital, a major port, and the lynchpin of the key Yangtze River Delta industrial complex. That's a primary production center for car parts, textiles, petrochemicals, heavy machinery and crucial components from computer circuits to zippers.
The backlog in factories and warehouses will take months to clear. What's more, friends of mine who have "escaped" Shanghai say they feel scarred by the ordeal. While they don't expect freedom of expression on many fronts, they do expect freedom of movement, and freedom to work. When even the ability to get your own groceries was removed for months at a stretch, they really started to realize how easily the kinds of freedoms that they take for granted could in fact be removed.
There has been immense pressure on local officials to rid their districts of Covid. Their jobs are at risk if infection rates spike. So they were incentivized to restrict movement and stop the spread of the disease at all costs, with the economic and social effects only to be made clear down the line. Those costs must still be paid.
Covid does appear now to be under control. The nationwide case count fell to 131 on May 31, as the Chinese Center for Disease Control and Prevention reports Wednesday. That's down from more than 1,000 cases as recently as May 21, and an all-time high of 29,411 cases on April 14 alone.
But only if China continues to restrict movement heavily and test its populace repeatedly can it maintain such a low rate. There are still Covid outbreaks in roughly half of China's 31 provinces. While the case count is incredibly low by the standards of the outbreaks we have seen in the West, the disease remains in circulation, suggesting further outbreaks are likely should the testing/lockdown regimen be relaxed.
China also still has its borders closed. The National Immigration Administration insists it is still allowing foreign travel, but only for "necessary" or "urgent" matters such as medical treatment, research, trade and scholarship. It said in February that it would stop re-issuing passports to people who want to travel for pleasure or other non-essential purposes. The number of Chinese passports issued in the first half of last year, at 335,000, was just 2% of the number issued in the first half of 2019.
It was with the economic reforms of Deng Xiaoping in the 1990s that Chinese citizens started to break through the "Bamboo Curtain" and travel abroad. Covid has quashed what's become a US$255 billion Chinese tourism boom, accounting for around 20% of international tourism spending, according to the World Tourism Organization. That spending will not return anytime soon.
Foreigners are not allowed to enter China, except in emergencies. The authorities are not issuing tourist or student visas, and any non-national must demonstrate that they're traveling to visit a critically ill Chinese citizen, or reuniting with immediate family who are permanent residents in China.
It will take months for the effects produced by the lockdowns of the last two months to clear. The strain may force an added C¥1.1 trillion (US$165 billion) in bank loans to be forborne, Standard & Poor's reports. Nonperforming loans will rise to 6.5% of all loans, up from 6.0% at the end of last year, the rating agency estimates.
Property developers will continue to topple, and could take poorly capitalized banks with them. Some 40% of developers were already in financial trouble at the end of last year, S&P states, higher than the 33% it initially estimated in December.
"Recent backpedaling on tough property policies will help stabilize the market and offset other drags on economic growth," S&P Global Ratings credit analyst Esther Liu says. "However, it could take several quarters, at least, for eased mortgage-loan rates and dialed-back home purchase restrictions, among measures, to stem the downturn."
While banks typically have the buffers to withstand the worsening growth trends for 2022, the financial industry is likely to polarize. Weak banks and those that have been overly aggressive in the past will face severe regulatory pressure. Beijing is willing to step in to support banks it deems essential, but it has also allowed institutions such as Baoshang Bank to go bust.
S&P cut its outlook on three major banks today, the Bank of Communications (BCMXY) (HK:3328), China Citic Bank (CHCJY) (HK:0998) and China Minsheng Banking Corp. (CMAKY) (HK:1988). Banking and the property sector remain the key systemic risks to watch.
For now, the emergence from Covid is stop-start, and will continue to be for as long as China maintains its zero-Covid strategy. Beijing continues to escalate restrictions in some districts. Shenzhen, which entered lockdown earlier than Shanghai and has emerged through much of April, is also requiring PCR tests within the last 72 hours for citizens to enter public places.
So Shanghai is free, sort of, and the Chinese economy can function not freely but better. It's a start. "Shanghai's phased-in reopening may only represent a respite rather than a turning point," Nomura concludes in a note to clients.