Goldman: China’s Zero-Covid Policy Presents Risks to Global Investors

China’s lackluster performance and recent crackdowns on tech, energy, and housing may only add to the gap between emerging and developed markets.

Qilai Shen/Bloomberg

Qilai Shen/Bloomberg

The Chinese city of Xi’an has been on lockdown for almost three weeks. Apart from the 14 million residents, the city is also home to several memory chip manufacturing facilities, including those of Samsung Electronics and Micron Technology.

Although China’s strict zero-Covid policy implemented at the start of the pandemic was effective early on, the approach has disrupted global supply chains, worrying investors who have bet on a globalized economy, according to the latest report from the Investment Strategy Group at Goldman Sachs.

The China findings are just one part of Goldman’s outlook published Wednesday. The report includes the firm’s investment recommendations and its 2022 outlook for global economies and financial markets. Notably, the firm continues to recommend that investors stay in the markets, acknowledging concerns over valuations being at highs, the long bull run, and potential actions by the Federal Reserve and other central banks to rein in inflation.

The report, titled Goldman Sachs Private Wealth Management Investment Strategy Outlook, identified two key risks associated with the pandemic in 2022. For one, the appearance of more transmissible variants like Delta and Omicron are preventing workers “from rejoining the workforce in the face of rising cases.” Secondly, China’s zero-tolerance on Covid-19 might “hamper some supply chains for longer than anticipated,” rippling into other sectors, according to the report.

For example, China shut down the world’s third-busiest transportation hub, Meidong Terminal, after a worker tested positive in August. The closure significantly affected the global shipping market as major container lines were forced to reroute to neighboring ports. Two months before that, the country closed the world’s fourth-busiest port in Yantian after a few crew members on a container ship caught the virus, bringing a halt to more than 90 percent of the world’s electronics export.

“Without effective vaccines and with limited natural immunity from prior infections, China cannot readily abandon its zero-COVID policy,” the Goldman report said. It added that recent studies have shown that loosening pandemic controls could overwhelm the country’s medical system with over 630,000 infections per day.

The report also noted that China’s slowing GDP growth paints a complex picture for emerging market investors. “After an initial rapid recovery, the Chinese economy has lost steam,” the report said. Chinese decision-makers have strong incentives to stabilize the economy in the face of the 2022 Winter Olympics in Beijing and the 20th National Party Congress, where Xi Jinping is expected to be appointed for a third term. Even so those moves are unlikely to reverse the declining growth rate, which Goldman predicts to be somewhere between 4.7 and 5.3 percent in 2022.

“EM GDP still remains about 5 percent below its pre-pandemic trend,” the report said, adding that China’s lackluster performance and recent crackdowns on the technology, energy, and housing sectors may only add to the growth gap between emerging and developed markets.