Global banks’ profits dented by China’s zero-Covid stance

CHINA may be a market that is too big to ignore, but global banks are finding that they need a very strong stomach to survive the near-term roller coaster ride as Beijing adheres to its strict zero-Covid policy stance and "common prosperity" drive.  

Official figures released over the weekend give a peek into the state of the economy in the second quarter, and notably, the impact of the country's zero-Covid stance, with Shanghai’s lockdown the latest in the past two years of Covid restrictions. The lockdowns and travel curbs are taking a toll on businesses and residents. China is estimated to have lost about half its Western expatriates since Covid-19 started. Many economists reckon it will be tough for Beijing to achieve its economic growth target of about 5.5 per cent for 2022. 

Activity in both manufacturing and services sectors fell in April to the lowest point in more than two years. The official manufacturing purchasing managers’ index (PMI) fell to 47.4 from 49.5 in March, signalling that China’s factory activities were in their worst contraction since February 2020. The official non-manufacturing PMI, which measures business sentiment in the services and construction sectors, tumbled to 41.9 in April from 48.4 in March, also the lowest since February 2020 and the second lowest on record. Even if China begins to ease restrictions in mid-May, its economy is on course to decelerate to below 2 per cent growth in the second quarter, year on year. That would be the second-slowest growth recorded since the 1990s, said Lombard Odie’s Chief Investment Officer, Stéphane Monier.

Erstwhile a key driver of global economic growth and a strong contributor to corporate profits, China has instead been a cause for concern in the past year, as Beijing tightened its oversight on key sectors from real estate, Internet technology and financial services to education. Global banks that recently disclosed their financial breakdown for Asia, such as UBS, Credit Suisse, HSBC and Standard Chartered, all posted lower regional profits for the first quarter of 2022.  Singapore banks - DBS, UOB and OCBC - too reported drops in their first-quarter earnings as wealth management took a hit. The most commonly cited reasons were property-related uncertainties, poor equity market performance and the Covid-related restrictions of China.

Clearly, President Xi Jinping’s zero-Covid tolerance and "common prosperity" drive are starting to bite. Investing in China requires adhering to policies aligned with the Chinese Communist Party’s long-term vision, rather than industry trends or corporate development. Those who intend to stay for the long term must have nuanced policy understanding, be vigilant in adapting to the new landscape, and willing to make strategic adjustments to navigate China’s complex and ever-evolving ecosystem.