Samuel Shen and Xie Yu

HONG KONG/SHANGHAI – As China intensifies its zero-COVID policies, prolonged lockdowns have been a major risk for its economy and markets. Money managers are forced to reduce their holdings, or take defensive measures against stocks.

Pictet Wealth Management, Principal Global Investors, and MegaTrust Investment are global fund managers. They also have China-focused managers like MegaTrust Investment or Water Wisdom Asset Management.

MegaTrust Investments (HK) chief executive officer Qi Wang stated that “the city-wide Shanghai lockdown was a huge deal.” “This risk is not going away with time. And this is in contrast to the Russia-Ukraine conflict.

China’s stock exchanges are second in the world this year, behind Russia due to sanctions. Their main index is down 17% for 2022. In March, the economy suffered a sharp slowdown due to the impact of sanctions-hit Russia on consumption and real estate.

China’s top-listed companies such as SAIC Motor Corp. and Semiconductor manufacturing International Corp. have had their production disrupted due to lockdowns in Shanghai, which began in March in an attempt to control the worst outbreak of coronavirus in China in over two years.

Although many manufacturers have begun to prepare for the reopening of their Shanghai plants, it is possible that factories will not be able to continue to function in this city which remains closed to traffic.

Principal Global Equities’ Alan Wang manages China-Hong Kong stocks worth $6 billion. He says that the current situation is quite disappointing.

Wang’s fund has slashed its holdings in internet companies and e-commerce that are dependent on consumers demand and moved to more defensive industries such as infrastructure and utilities.

Pictet Wealth Management’s Asia head of macroeconomic research, Dong Chen, said investors were primarily concerned by China’s regulatory crackdowns beginning in 2020.

They are now concerned about the impact on business and consumer confidence as well as the economic outlook, even though the government is pushing ahead with its zero COVID strategy.

It can also be a political decision. We are seeing an increase in the risk of policy mistakes. Chen explained that many investors are now more concerned about this policy error.

Li Huiyong is the chief economist of HwabaoWP Fund Management Company. He stated that COVID was the greatest concern for the mainland capital markets. This outweighed external factors like the Russia-Ukraine Conflict and U.S.monetary tightening.

    The economy will suffer further, “if COVID is not brought under control, or China’s anti-virus policy is not adjusted,” he said.

Graphic: For China investors, COVID lockdowns are the clear and present danger, https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnynjnvq/COVIDshares.png ECONOMY BESIEGED

Russia calls the conflict in Ukraine a “special operation” and it has already affected China’s stocks. In March, $6.3 billion was withdrawn from China due to fears that Beijing might be subject to western sanctions because of its close ties with Moscow.

The COVID lockdowns, however, are much closer to home and have visible impacts.

Nomura’s analysts last week stated that 45 cities of China, representing 40% of China’s GDP were currently under partial or full lockdown. The economy is now at increasing risk of recession.

China announced Friday a reduction in banks’ required reserves ratios to cushion the slump. It also pledged to help the most vulnerable sectors and increase spending on infrastructure.

    But Hwabao’s Li said such measures would barely help in sealed cities.

    “Even if I get the nod for a project, I cannot start construction; even if I get liquidity support, I cannot turn that into transactions; and even if I have money, I cannot go shopping,” he said.

Andrew McCaffery is Fidelity International’s chief investment officer global for asset management. He stated that policies to combat the pandemic remain one of the greatest questions about China’s economy. “With outbreaks and the consequences of large-scale locks like those we saw in Shenzhen, Shanghai, and other places, these will drag down production and make China’s aim of growing at 5.5 percent this fiscal year difficult.”

Yuwei at Water Wisdom Asset Management, who manages a hedge fund that is short Chinese stocks put it bluntly.

   Seeking to contain the highly contagious Omicron variant with a zero-tolerance policy is like “trying to put out a blazing cartload of faggots with a cup of water,” he said.

    If Beijing scraps the policy, that would “offer the real signal that the market has hit its bottom.”