A woman walks past a cinema that has closed following the coronavirus disease (COVID-19) outbreak in Shanghai
(Picture: REUTERS)Covid-19 is back on the world’s agenda after a fresh outbreak in China that has investors worried.
Chinese stock markets have plunged this week on fresh concerns about surging Covid cases that have led to further lockdowns across the country.
As of Tuesday, new Covid-19 cases have been reported in 21 provinces and municipalities across China, including the capital Beijing and other major cities including Shanghai and Shenzhen.
Although cases are relatively low - in the low thousands - almost 40 million people have been placed in lockdown as China tries to prevent another wave of the virus. Non-essential businesses have been closed as part of the shutdown.
Hong Kong’s Hang Seng index fell almost 6% on Tuesday to its lowest close in six years, and the China Enterprises index of large and liquid Chinese stocks dropped 6.6%.
Billions have been wiped off the value of Chinese stocks since the start of the week. Neil Wilson, chief market analyst at Markets.com, called the sell-off “absolute carnage”.
Should we in the West be worried?
For those in the City, the major concern is what lockdowns across China could mean for the world’s growth. China is the world’s second biggest economy and any lockdown-induced slowdown will have knock-on effects beyond its borders.
Technology and energy stocks have been the worst affected by fears that already beleaguered global supply chains could face further setbacks due to lockdowns. Apple dropped 2% on Monday after news that iPhone manufacturer Foxconn was shutting some factories.
In London, investors have shunned China-linked companies. Victoria Scholar, head of investment at Interactive Investor, said: “Prudential, Rio Tinto and HSBC are among the companies on the FTSE 100 with the biggest exposure to China overall.
“These stocks are languishing at the bottom of the index today, with Prudential and Rio both down by more than 3.8%, highlighting investor nervousness towards China-exposed business.”
Ultimately, China’s economic growth is at risk, Scholar said.
“There are already growing expectations that China’s 2022 growth could come in at zero percent, sharply below the government’s 5.5% target. There could be shockwaves across global supply chains, at a time when the world is attempting to get back up to speed post-pandemic.”
It’s not just Covid which is causing jitters: China’s potential support of Russia’s war against Ukraine is creating uncertainty. The threat of the potential delisting of some Chinese stocks from US exchanges as a result of new audit rules is also causing concerns.
These factors help explain why Chinese stocks have suffered so heavily in recent days while markets in the West have largely recovered.
“We expect more near-term market volatility until there is more clarity on the effectiveness of these new [Covid] containment measures,” Mark Haefele, chief investment officer for global wealth management at UBS, said.
Ultimately, many in the City hope the issues in China will be short-lived and cause just a small blip to overall growth rates this year.
Haefele said: “While the latest lockdowns could pose a downside risk to our expectations for China to ease its Covid mobility curbs in 2Q, we also note that the hit to sentiment from prior outbreaks has tended to be transitory.”
