China unrecovery to end in another shock

The new Chinese unboom is here. TSLombard:

Omicron remains the single most-important China macro variable. We think healthcare and political constraints mean the zero Covid policy is here to stay for at least the next six to nine months. Beijing is pushing on the stimulus accelerator, but the Covid brake on activity will remain and pulldown full year growth to 3.3% yoy with risks to the downside. Second-and third-order impact of zero Covid make stabilizing property prices and providing stimulus more difficult. There are, however, two reasons for faint optimism: newly released directives on Covid control that seek to mitigate economic spillovers from city-level lockdowns and corruption investigations into testing companies and local officials. The former indicates that the worst in Covid-related economic damage may be over, but it does not alter our view that rolling lockdowns will persist over the next six to nine months. This points to more fiscal and monetary easing, with an extra government bond quota highly likely. Overall, the outlook reinforces our negative RMB view and is supportive of infrastructure-related equities and China bond steepener trades.

Zero Covid is here to stay. We have long maintained that China’s zero Covid policy will persist throughout 2022, as healthcare (ICU beds, vaccination rates) and political considerations (the upcoming Party Congress) prevent a relaxation in policy. The over-80s are particularly vulnerable, with a national vaccination rate estimated at 20% and little sign of increased vaccine uptake in the past weeks. Meanwhile, state media and politicians continue to emphasize the need for “faster, stricter and more effective prevention and control measures.”

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