Investors’ Confidence in China Dips as Zero-Covid Continues

But optimists argue investors should take advantage of the appreciation of the U.S. dollar against emerging market currencies.

Bloomberg photo

Bloomberg photo

Global investors’ view of China has grown darker as many see no end to the country’s zero-Covid policy.

The tightening Covid controls in China have worried global investors since the start of the year. Many expected the policy to ease after the 20th National Congress, a major leadership reshuffle that lays out the political and economic agenda for the coming years. But in an opening speech on Sunday, Chinese president Xi Jinping doubled down on the zero-Covid strategy even as macroeconomic conditions deteriorate.

Andy Rothman, chief investment strategist at Matthews International Capital Management and a former foreign service officer at the U.S. Department of State, cited the policy as one of the most negative investment signals from the party congress. “The Chinese economy is weak right now because families and businesses are afraid to spend and afraid to hire,” he said. Although China’s strict Covid restrictions implemented at the start of the pandemic were effective early on, the approach has disrupted global supply chains and curbed economic activity. “It needs to be changed,” Rothman said.

Matt Gertken, chief geopolitical strategist at II sister company BCA Research, advised investors to stay underweight in China after Xi delivered the speech. “The sharp rise in Chinese policy uncertainty under the Xi administration immediately translated into equity market underperformance,” he wrote in a new report. “Any short-term relief rally after the party congress is an opportunity to reduce exposure to Chinese assets due to the long-term combination of debt-deflation and geopolitical conflict.”

Chinese stocks plunged to multi-year lows in Hong Kong and New York in the days following Xi’s speech. Technology stocks such as Alibaba, Tencent, and Baidu were among the hardest hit.


Marko Papic, who leads Clocktower’s strategy team, said the consensus expectations of investors after the national congress is that Beijing is unlikely to completely abandon zero-Covid at least in the first half of 2023. “[It will] definitely be a concern [for investors] as it may cause constant economic disruptions and prevent Beijing from effectively stimulating domestic demand,” he told II. But he added that the pessimism toward China’s Covid policy may turn out to be an opportunity because “any marginal relaxation of Covid controls may significantly boost investor sentiment.”

The worsening outlook comes at a time when investors’ sentiment towards the country has grown more polarized. Lawmakers across the U.S. have imposed restrictions on China investments, pressuring allocators such as the Florida State Board of Administration to rethink their strategies. Earlier this year, the Yale University endowment was pressured to investigate its China holdings over potential human rights violations.

But some managers argue that the depressed valuations in the Chinese markets present excellent investment opportunities, especially in the technology sector.

Robert Horrocks, chief investment officer at Matthews Asia, thinks U.S. investors have an advantage in China given the appreciation of the U.S. dollar against almost all major currencies. “Yes, China is a difficult market at the moment…[But] It seems to me that, if you are willing to wait, you’ll get paid for that patience,” he said.