Originally published December 2022.
Investors should be concerned about socio-political development in China as it has profound economic and geopolitical implications that will reverberate around the world. The acts of public defiance in China witnessed a couple of weeks ago might have caught many commentators and investors by surprise, but what is more flabbergasting to note was how these protests managed to take off and rapidly spread around the authoritarian state, where citizens have been kept under intense surveillance with restricted information flow underpinned by its Great Firewall. It is also interesting to note how effective and timely the state machine was to contain social instability. With the coincidental passing of former president Jiang Zemin (his death 30 years ago today was the spark for the Tiananmen Square protests), Beijing has every reason to calm public nerves quickly, stopping any events from fermenting further. Now, the situation looks broadly under control by the authorities.
To do that, China has signalled and deployed many measures to ease public pressure as expected. First and foremost, an easing of Covid restrictions, although degree of relaxations remained localised and differed between regions and cities. In fact, normalisation is now the pressing task for the authorities. It was believed that most protestors were only dissatisfied with stringent zero-Covid policies affecting their daily lives, whereas their subversive intentions were still largely in its infancy despite anti-government slogans being chanted. However, with China’s obsession with gradualism and the insistence on ideology superiority on Covid policy, a full zero-Covid exit (and for the economy to turn around fully) is still some way off. For instance, PCR testing might no longer be needed to enter public venues, but the health codes system based on a tracking app will still be enforced for some time. To be fair, this gradualism may work in China’s favour, because a sudden removal of all restrictions might result in stress on its medical resources, making its already fragile healthcare system unable to cope with a full outbreak.
Second, in preparation for re-opening, China has started ramping up vaccination efforts for the elderly and vulnerable, as the current vaccination rates still lag those of other major economies.
“With an increasing number of middle and working class suffering from joblessness or stagnant income growth, there runs a risk that social discontent could flare up again”
Third, to put an end to civil unrest, numerous activists were detained while stop-and-search checks for banned mobile contents have become the norm to restrict information pertinent to protests. But without further reforms in its political and economic system, China might just be kicking the can down the road. With economic growth likely to slow in the near term despite a boost from post-Covid ‘revenge’ economic activity, falling external demand and a weak property sector are unlikely to add to growth. With an increasing number of middle and working class suffering from joblessness or stagnant income growth, there runs a risk that social discontent could flare up again. When people realised protesting with a blank sheet of A4 worked successfully in changing government policies, the temptation is to do it again when there is a disagreement.
A couple more observations from last week’s event. After a regulatory crackdown on ‘socially important’ sectors in 2021, investors had demanded higher risk premium attached to Chinese assets in return. Investors may want to reassess again whether this premium is now sufficient to cover an even higher policy and political risk associated with a more volatile social and business environment in China.
After the enactment of the new security law in Hong Kong, the city’s conventional role to disseminate China news and digest information for the investment community has certainly faded. Indeed, Hong Kong’s mainstream media had not reported the protests in China, let alone more in-depth analysis from the local experts there. It means that investors will find it increasingly difficult to gauge the climate in China and to make informed decisions about their investments going forward.
Overall, the authorities have decided to go down the path of loosening Covid controls and it is unlikely they will change course again, but the gradual reopening of China will be met with many challenges ahead. With rising uncertainty and poor business sentiment, coupled with weaker external demand and a dire property sector, China’s economic growth will remain weak in 2023. That said, a temporary economic boost from post-Covid activity is expected. Investors will likely price in more risks for their investment in China after the social upheaval last week, demanding a more embedded shift in risk premium compared to last year.
