Prolonged lockdowns in Shanghai, as China doubles down on its zero-COVID policy, have become the predominant risk to its economy and markets, forcing money managers to cut holdings or turn defensive on stocks.
The conflict since late February in Ukraine, which Russia terms a special operation, had already hurt China stocks, spurring $6.3 billion of outflows in March on fears that Beijing could face western sanctions due to its ties with Moscow.Analysts at Nomura said last week that 45 cities in China - making up 40% of China's GDP - were under full or partial lockdowns, with the economy at growing risk of a recession.
To cushion the slump, China on Friday announced a cut to banks' required reserve ratios, and has vowed to support the hardest hit sectors, increase fiscal spending and boost infrastructure investment."Even if I get the nod for a project, I cannot start construction; even if I get liquidity support, I cannot turn that into transactions; and even if I have money, I cannot go shopping," he said.
In Fidelity International's second-quarter outlook, global chief investment officer for asset management Andrew McCaffery said policies to contain the pandemic remained the biggest question marks over China's economy, "with outbreaks and the effects of large-scale lockdowns like we've seen in Shenzhen and Shanghai bound to drag on output and make China's target of achieving growth of around 5.5 percent this year a challenging one".
Yuan Yuwei, a hedge fund manager at Water Wisdom Asset Management who is short Chinese stocks, put it more bluntly. Seeking to contain the highly contagious Omicron variant with a zero-tolerance policy is like "trying to put out a blazing cartload of faggots with a cup of water," he said.Register now for FREE unlimited access to Reuters.comSubscribe to our sustainability newsletter to make sense of the latest ESG trends affecting companies and governments.