How China Stock Market is affected after the Covid Policy

Timeline of the Event

In March, China rolled out one of its biggest COVID-19 lockdowns since the start of the pandemic and it has pretty much been on lockdown on-and-off every since.

After enduring the lockdown for extended periods of time, what was the straw that ultimately broke the camel’s back and caused the protests? The protests were triggered by a deadfire last Thursday in Urumqi, the capital of the far western region of Xinjiang. The blaze killed at least 10 people and injured nine in the apartment building it took place in. Due to lockdown measures, the firefighters’ trip to the rescue was delayed. This caused public fury and uproar especially after videos of it were shared online and cascaded through the cities. By the weekends, thousands of citizens have taken to the streets in more than a dozen cities.

China Stock Market

To provide context, after almost 3 years of lockdown measures, China’s economy has been substantially stunted and youth unemployment is nearly 20%.

This has caused ripple effects across the country. Shares in Asia-Pacific fell on Monday. Hong Kong’s Hang Seng index has also fallen by 1.6%, leading to losses.

One of the reasons for this ripple effect is due to the impact on risk appetites of stockholders. I have attempted to make sense of this with consideration of the individual stock market. We would be zooming into the Security Market Line (SML) that is part of the Capital Asset Pricing Model (CAPM).

How it Works?

Due to protests, it is inevitable that supply chains and business would be affected. As such, stockholders become more wary about the stocks they hold. Hence, their risk appetite changes from normal to less willing to affect risk.

This shifts the SML upwards as it steepens. This is because stockholders now require a greater reward for bearing the same amount of risk as before to feel secure about their own investment. As the required rate of return increases, the prices of the stock have to be lowered for the investor to have the same required return. As a result, this causes stock prices to drop. This affects not only the companies, but existing stockholders as well. For companies, this means lesser equity and cash, which can limit their R&D efforts and developments. And for existing stockholders, this means that the stock they are holding onto is also worth less. This can certainly cause heightened uncertainty amongst everyone and this also explains why everyone is waiting for the protests and lockdowns to end.

What’s Next?

That being said, there seems to be hope going into the new year. This is because many investors are firm that China will eventually have to open up despite the Covid Zero exit plan. Even amidst the volatility caused by the rising protests in China, investors hold on to the glimmer of hope for an inevitable opening-up. And this hope has had a positive effect on the bonds. This can be seen as according to the Bloomberg index of China, offshore dollar bonds of all ratings are set to experience their monthly gain since August 2021. Overall, investors are hopeful but they would certainly heave a sigh of relief if China moves towards accepting Covid cases and opening the borders again.

Fortunately, China has officially lifted the zero-Covid strategy after a week of protests. Naturally, many rejoiced at the loosening of the policy especially after it had controlled their lives for almost three years.