China markets rebound but analysts flag downside risks to growth

Singapore

CHINA markets rebounded on Wednesday (Mar 16) after registering heavy losses in early trade over initial lockdown fears.

Xinhua news agency reported that China will keep the stock market stable and support overseas share listing, citing a meeting chaired by Vice-Premier Liu He.

The report follows a series of articles by state media in recent days seeking to talk up sentiment after a historic rout erased US$1.5 trillion in value over the past 2 sessions.

Investors were initially on edge over the largest Covid-19 outbreak the country has seen since more than 2 years ago when the pandemic first began.

At least 13 cities across the world's second largest economy, affecting nearly 30 million people, have been fully locked down since Tuesday, including the north-east province of Jilin and the southern tech hub of Shenzhen.

Already, some companies are reporting that their facilities have to be shut, in line with the local government's directive.

Precision manufacturer Broadway Industrial said in a filing on the Singapore Exchange on Wednesday that all of its non-essential manufacturing operations in Shenzhen would not be running for 1 week, with operations expected to resume on Mar 21.

A research report by Maybank noted that technology products manufacturer Aztech has revealed that its Dongguan facility, which is in the Guangdong province, will be shut until the same day, as the Dongguan government has announced mass polymerase chain reaction (PCR) testing for city residents.

Shanghai Ocean Aquarium, which is a subsidiary of tourism attractions operator Straco Corporation, will also temporarily close, and its reopening will be announced in due course.

Despite the assurance by the Chinese authorities that have lifted sentiments, analysts are flagging concerns over the emergence of various downside risks to China's growth.

Bank of Singapore's chief economist Mansoor Mohi-uddin said in a report on Wednesday that financial markets are worried that China's 2022 growth target of around 5.5 per cent "will be imperiled".

DBS Group Research analysts Nathan Chow and Samuel Tse pointed out in a report that factories in Shenzhen and the wider Guangdong province, many of which are giant WMNCs that have shut their production line, account for 23 per cent of the nation's exports.

ING's chief economist for Greater China Iris Pang said that the lockdown in Shenzhen could affect port operations but the disruption caused by a lockdown in the tech hub should not affect productivity substantially since its main activity is technology services.

Instead, the spread of the coronavirus in the north of China could be more damaging as the region is more focused on heavy manufacturing.

Some analysts have even started cutting their growth forecasts for China.

UOB Kay Hian analysts Carolyn Ching and Tham Mun Hon said they have lowered their forecast of China's gross domestic product (GDP) growth to 4.8 per cent from 5.3 per cent.

This is because they have revised downwards their forecast of China's full-year retail sales, exports and supply-side industry production growth.

"We also believe the spikes in commodity prices and upholding of the "zero-Covid" policy will limit industrial production growth and the strength of a consumption growth recovery, and is consistent with our downbeat outlook on retail sales and exports," they said.

However, Bank of Singapore's Mohi-uddin said that manufacturing production may rebound quickly to absorb the slack caused by shutdowns.

He expects that the Chinese authorities will aim to reach this year's GDP growth target by continuing the fiscal easing outlined at this month's National People's Congress to boost.

China's central bank is also expected to cut key interest rates further to support activity.