China’s Covid Calamity Hides Deeper Problems
Investors, not to mention 1.4 billion Chinese, are getting a serious case of watch-what-you-wish-for since Xi Jinping’s government abruptly ditched its “zero-Covid” policy three weeks ago.
The iShares MSCI ChinaMCHI –1.84% exchange-traded fund (ticker: MCHI) is about even since Beijing’s Dec. 7 U-turn, as markets weigh what could be 250 million new Covid-19 cases against a “reopening” that would ignite the Chinese consumer.
Big as that number is, this moment is bigger still for China. Its shambolic recent management of Covid underlines deeper structural weaknesses in Beijing’s form of government and social organization.
First, there’s its secrecy obsession. China was forced into zero-Covid because it never publicly ran proper clinical trials for its domestically produced Sinovac vaccine. No one knew, or knows, how well it really works. Now Beijing is running the biggest clinical trial in history on its entire population. Estimates of new Covid cases in December range from that 250 million, reportedly leaked from a closed-door meeting, to an official figure around 63,000. Quite a disparity.
Throw in foolish national pride. China refused to import superior mRNA vaccines from the West, though it could certainly have afforded them.
Second, Potemkin development. Covid’s ravages will be amplified by a healthcare system that is strangely underfunded for a burgeoning economic power that has famously built the world’s best airports, trains, and so on. Grandiose infrastructure, you might guess, offers more boondoggle opportunities for officials, and a glossier national image.
Bureaucratic incentives also helped drive China’s gargantuan property bubble. In the absence of property taxes, local governments have lived mostly by selling public land to developers. The price of land in China has increased 80-fold since 2004, estimates Arthur Budaghyan, chief emerging market strategist at BCA Research.
That’s left a double-barreled mess of overindebted builders and unaffordable prices for starter families in major cities. An announced $256 billion bailout will keep some developers out of bankruptcy, but will barely affect the underlying structural tangle.
Most important, the unfolding Covid debacle could cost China’s mandarins their aura of invincible competence domestically, puncturing the international belief that the country will inevitably surge to equality with the U.S. It’s early to say that this is China’s Japan 1991 moment, when property prices went into a 17-year tailspin and the much bemoaned “Japanese threat” evaporated. At best, Chinese families will think twice before prepaying their life’s savings for an apartment that, experience now shows, might never be built.
Investors betting on a Chinese equity rebound, like the one U.S. stocks had in 2020, might want to look at their charts again. The S&P 500SPX –0.25% lost 30% in five weeks after Covid became a thing in February of that year. It didn’t regain its starting point until August.
Chinese stocks offer a much better valuation story. They’re trading at seven-year lows, even after a fourth-quarter rally. And the masters of Beijing have great achievements to boast of: the largest and fastest march out of poverty, and into industrial/technical dominance, the world has ever seen.
They may catch a break by unleashing their pandemic when the less lethal Omicron virus is prevalent. It could all blow over by the spring, with liberated shoppers, tourists, and home buyers emptying their hitherto zipped-up wallets. But that’s tough to bet on right now.
“Reopening won’t be a straight line,” Budaghyan says. “The next few months will see a lot of volatility.”