Chinese stocks are rebounding following the reopening of its economy as coronavirus cases decline on a nationwide basis. As a result, the China Large-Cap ETF (NYSE: FXI) is up more than 15% over the last 2 weeks. Interestingly, Chinese stocks made a higher low in May vs most global indices which made a lower low. Of course, this comes after more than 2 years of underperformance with FXI about 4% lower than its March 2020 level.
2022 has been a very challenging year for investors and policymakers for a variety of predictable and unpredictable reasons. One of the main uncertainties dragging down the economy has been the lockdowns and restrictions on activity and mobility in China as that country deals with another wave of the coronavirus more than 2 years after the country's first round of lockdowns to deal with the virus.
Initially, China was praised for its vigilant and aggressive response which is only possible in an autocratic country. This included aggressive lockdowns on any hint of the virus coming back and forced quarantining of anyone infected. This has proven to be effective in containing localized outbreaks but not so effective in making the country more resilient. A drawback to this strategy is that there is little evidence of increasing 'herd immunity' especially as the Chinese vaccine has so far proven to be ineffective.
Contrast this to the strategy in Western nations which has focused on vaccinating vulnerable populations. Additionally, some approximation of 'herd immunity' has been reached through infections and vaccines which is now allowing for a full reopening of the economy even despite the virus flaring up here and there.
As a result of its 'zero-COVID' policies, China is not close to herd immunity nor have they prioritized the vaccination of vulnerable groups. Thus, the threat of more lockdowns persists especially as the Chinese government very rarely changes its policies. This has obviously caused a lot of stress for financial markets as the economy was already dealing with a slowdown in the property market and a crackdown on tech companies.
However, this does have the potential to provide a healthy 'growth impulse' to global markets as Chinese demand and economic activity resume. It can also help with inflation as one component is the extremes in shipping and container rates due to a backlog of ships. Additionally, if China's economy does successfully reopen, then it increases the odds that the May lows in stock prices will hold up.