China is experiencing serious economic issues. The housing market is crumbling, youth unemployment has reached a record level, growth has stagnated, and businesses are dealing with ongoing supply chain issues.
Chinese officials relaxed Covid testing standards in major cities over the weekend as Beijing appeared to be orchestrating a gradual departure from its stringent Covid Zero policy amid increased instances and public complaints. Chinese Vice Premier Sun Chunlan said last week that the country’s pandemic control has entered a new phase. Confronted with evolving challenges and tasks, the government will take small, consistent steps to optimize Covid measures, she said. Three years of Xi’s “zero-COVID” policy and a lingering property crisis have taken a toll. Economists have downgraded their forecasts for 2022.
Some low-risk patients in Beijing's capital are permitted to isolate at home, avoiding the contentious quarantine camps that have been a cornerstone of China's strategy since the Wuhan outbreak, while the government is putting more effort into boosting elderly vaccination rates and increasing booster coverage.
In Zhengzhou, where Apple Inc. has its largest production facility in China, restrictions are also being eased. Authorities declared on Sunday that the requirement to pass a Covid test in order to board buses, subway trains, taxis, and other public transportation, as well as for individuals who leave the city or visit karaoke bars and internet cafes, will immediately halt.
S&P Global Commodity Insights expects Covid Zero to be maintained at least until mid-2023, said Lara Dong, a senior director at the research firm. Others, including Goldman Sachs Group Inc., have said there’s a chance the policy could end sooner, although the exit could be disorderly.
Economists are bringing forward their projections for China’s exit from Covid Zero as the government begins relaxing controls in many cities. Nine of the 16 economists surveyed by Bloomberg last week said China will reopen the country faster than they had previously expected. Of those, four say it will happen in the second quarter of 2023, while three see it happening earlier. Of the 16 economists polled by Bloomberg, seven predict the reopening will happen in the second quarter of next year, and four see it in the first quarter. The economists weren’t asked to define what a full reopening would entail.
Five of the 16 economists said they will lower their growth forecasts for the fourth quarter and the full year of 2022. The median projection was lowered to 3.8% and 3.2%, respectively, from 3.9% and 3.3% in the previous November survey.
The People's Bank of China decreased the reserve requirement ratio for the majority of banks by 25 basis points. The adjustment will add 500 billion yuan ($70 billion) in liquidity to the economy when it goes into effect on December 5. The decrease is intended to "maintain liquidity reasonably adequate" and "increase the assistance for the actual economy," as well as to enable banks in assisting sectors hit hard by the Covid epidemic.
Recently, Chinese stocks have risen as a result of growing anticipation that China will scale back its pursuit of Zero Covid. In Hong Kong, the benchmark Hang Seng Index recorded its largest monthly gain since 1998, and the Hang Seng China Enterprises Index gained 30% in November to finish its greatest month since 2003. the yuan strengthened by more than 4% That rise was fueled also by a softening in the Federal Reserve’s rate-hike stance.
Morgan Stanley on Sunday lifted Chinese equities to overweight from an equal-weight position it had held since January 2021. Goldman Sachs Group Inc. predicted that China’s stocks will outperform in 2023, while Bank of America Corp. said it has turned tactically positive. “There are more signs of relaxation of Covid curbs, and the positive factors have not been fully priced in by the market,” said Kenny Wen, head of the investment strategy at KGI Asia in Hong Kong. “I expect more funds to continue to hold long positions in the remainder of the month for year-end window dressing purposes.”
Commodities from oil to soybeans to precious metals jumped after China eased some Covid restrictions, raising hopes of a demand recovery in the world’s second-biggest economy. Shares of companies across the commodities industry surged. Century Aluminum Co. jumped 23%, the most in six years, while top US producer Alcoa Corp. surged as much as 16%. Offshore oil and gas driller Transocean Ltd. added as much as 14% and oil refiner Phillips 66 climbed 5.6% to the highest since January 2020.
China's demand for commodities simply isn't where the markets anticipated it would be a few months ago. That is one of the elements affecting the pricing of agricultural commodities, metals, and energy. As a result, it is now a little bit simpler to address the inflation problem, which is currently the main issue facing the rest of the world.
“It’ll take time for China to exit from their Zero Covid policy,” said Ho Woei Chen, an economist at United Overseas Bank Ltd. in Singapore. “In the near term, China’s economy continues to face headwinds from the prolonged property market slump and high Covid infections weigh on consumption recovery. These factors may limit the gains in the yuan.”
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