China’s lifting of Covid curbs yields little cheer as recession fears weigh on markets

MARKET reaction to China’s reopening news has been muted, with several benchmark indices trading down and analysts saying the loosening is unlikely to boost growth significantly. This is especially so given recession fears looming in the West.

On Wednesday (Dec 7), China announced a nationwide loosening of Covid-19 restrictions. The country had been facing rare protests over its strict zero-Covid policy.

China said it would reduce the need for testing and lockdowns, as well as allow self-isolation at home for those with non-severe Covid cases. In its Politburo meeting, the Chinese government also said it would focus on economic growth.

The announcement had been widely anticipated and was to have given markets a boost, but investors reacted instead by selling on the news.

In the United States, the Dow Jones Industrial Average finished Wednesday flat, the S&P 500 fell 0.2 per cent, while the Nasdaq Composite Index dropped 0.5 per cent.

Most Asian markets opened lower the next morning. And the Nikkei 225, Kospi Composite Index and Jakarta Composite Index ended Thursday in the red. The Straits Times Index and the Hang Seng Index, however, closed in positive territory.

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Iris Pang, chief economist for Greater China at ING, said she was “not overly optimistic” that the relaxed measures and the Politburo’s direction will lead to a significant uptick in economic growth.

Fewer Covid tests should reduce fiscal deficits and boost the use of public transportation and services. Leisure travel will likely also rise during the Chinese New Year period given that travellers no longer need to show a green code on transportation, Pang said.

But moving quarantine locations from isolation facilities to homes will not increase retail sales significantly, she noted.

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Pang also expects Covid measures will be in place until the government is comfortable that Covid cases will not drag on the healthcare system.

Saxo’s Asia-Pacific strategy team said the measures “may be considered a bit underwhelming” when compared with higher expectations in recent days.

The measures also do not provide a more definite road map of exiting the use of lockdowns, the research team said in a note on Thursday.

Analysts also noted that sentiment over a looming recession in the US and Europe continues to weigh on equity markets.

Stephen Innes, managing partner at SPI Asset Management, said the recent Federal Reserve rate hikes – with several more in the pipeline – will likely put the US economy into a recession.

“Investors are reactively more concerned about the potential of a more severe recession than previously anticipated,” he said.

Innes also expects oil markets could be hit by surging infections as China exits its zero-Covid strategy.

Lim Siew Khee, deputy group head of research at CGS-CIMB, said some investors may also have seen the confirmation of a policy loosening as an opportunity to take profit.

Lim, who is also head of research for Singapore, expects a significant reduction in the quarantine period for travellers would likely result in a more positive market reaction, although she added that it would probably take time for the market to get more excited.