Our primary focus is attempting to understand how China’s economy rebounds following the lifting of the zero COVID policy.
Some interpret Hong Kong equity performance to reflect expectations concerning the direction and magnitude of China’s economic stimulus measures in 2023. During last week’s central economic work conference, China’s top authorities signaled intent to pursue “proactive fiscal policy” and “prudent monetary policy.”
Questions that remain concerning Chinese authorities’ ability to deliver economic stimulus in the face of two acute economic headwinds:
Risk of spiking SARS-2 infection rates as a direct result of easing pandemic restrictions
Policies enacted to deleverage speculative asset bubbles in the real estate and financial services sectors
The prospect of rapidly rising SARS-2 infections adds additional uncertainty to China’s 2023 outlook.
Monetary stimulus is still in the cards for 2023. However, the effectiveness of monetary stimulus in China may be limited. China’s central banking system lacks mechanisms for delivering liquidity to the real economy. When the PBOC lowers its loan, prime rate liquidity tends to pool within the state-owned banking sector.
Ultimately, any form of economic stimulus will depend heavily on investment in public infrastructure and real estate. In other words, Chinese authorities will likely need to rely on the same tools which produced significant asset bubbles in the real estate and financial sectors in the years following the great financial crisis.
It’s plausible that China’s economy begins to rebound in earnest following the conclusion of the Lunar New Year beginning in February. Until then, the short-term outlook remains murky until we have a better sense of the SARS-2 Omicron Variant’s impact on Chinese public health over the next 4-6 weeks.
China Economy
Hong Kong stocks gain on China stimulus bets while Bank of Japan stokes recession risk in shift to tightening path (South China Morning Post)
Hong Kong stocks gained on speculation China will shore up efforts to support the economy amid Covid-19 disruptions, while concerns about global recession heightened after the Bank of Japan joined the global policy tightening path.
The Hang Seng Index rose 0.3 per cent to 19,160.49 at closing of trading on Wednesday, after rising as much as 0.8 per cent. The Tech Index added 0.7 per cent while the Shanghai Composite Index declined 0.2 per cent.
Tencent Holdings climbed 0.5 per cent to HK$311 while Alibaba Group also added 0.5 per cent to HK$84.45. Hansoh Pharmaceutical surged 1 per cent to HK$13.92, while WuXi Biologics jumped 2.5 per cent to HK$51.25. Carmaker Xpeng soared 4.7 per cent to HK$38.85.
China to Ramp Up Monetary Stimulus as Growth Outlook Darkens (Bloomberg)
China signaled more monetary stimulus was on the cards, including a likely cut to the reserve requirement ratio for banks, as it ramps up support for an economy under strain from surging Covid cases and more lockdowns.
The State Council said in a statement Wednesday that monetary tools “such as a RRR cut” will be used “in a timely and appropriate manner” to maintain reasonably ample liquidity. A cut in the RRR -- the amount of cash banks must keep in reserve -- could land as soon as this week, given the central bank usually imposes a reduction within days of a cabinet statement such as this.
China Pandemic Policy
First foreign COVID vaccines head to China from Germany (Reuters)
Berlin has sent its first batch of BioNTech (22UAy.DE) COVID-19 vaccines to China to be administered initially to German expatriates, a German government spokesperson said on Wednesday, the first foreign coronavirus vaccine to be delivered to the country.
No details were available on the timing and size of the delivery, although the spokesperson said Berlin is pushing for foreigners other than German nationals, estimated at about 20,000, to be allowed access to the shot if they want it.
WHO “very concerned” about reports of severe COVID in China (AP News)
The head of the World Health Organization said the agency is “very concerned” about rising reports of severe coronavirus disease across China after the country largely abandoned its “zero COVID” policy, warning that its lagging vaccination rate could result in large numbers of vulnerable people getting infected.
At a press briefing on Wednesday, WHO Director-General Tedros Adhanom Ghebreyesus said the U.N. agency needs more information on COVID-19 severity in China, particularly regarding hospital and intensive care unit admissions, “in order to make a comprehensive risk assessment of the situation on the ground.”
Undercounted Deaths Cloud China’s Zero-Covid Exit (Wall Street Journal)
China has reported just a handful of Covid-19 deaths as a wave of Omicron infections has swept the country’s biggest cities, stoking suspicion among public-health experts and relatives of deceased patients that the government isn’t accurately accounting for the impact of the virus.
Despite widespread reports of soaring infections, crowded hospitals and overwhelmed crematoria, Chinese health authorities had by Tuesday reported only seven Covid-related deaths since the country abruptly eased many of its pandemic-control measures more than two weeks ago. Two deaths were reported in Beijing on Monday and five the following day.
US-China Relations
WTO rejects US 'Made in China' labeling on Hong Kong goods (Washington Post)
World Trade Organization arbitrators concluded Wednesday that the United States was out of line in requiring products from Hong Kong to be labeled as “Made in China,” a move that was part of Washington’s response to a crackdown on pro-democracy protesters there in 2019 and 2020.
A WTO dispute panel found the U.S. violated its obligations under the trade body’s rules and rejected Washington’s argument that U.S. “essential security interests” allowed for such labeling. The panel said the situation did not pose an “emergency” that would allow for an exemption under the trade body’s rules.