How China’s ‘Perfect Storm’ and Economic Headwinds Are Affecting Markets and Investors

Episode Summary

Executive Summary: Goldman Sachs experts argue China faces a near-term “perfect storm” of COVID lockdowns, property weakness, and geopolitical/regulatory pressure, but still remains investable. They see growth slowing to 4%-5% over time, with policy support constrained by deleveraging goals and political priorities, while Chinese equities look inexpensive and sector rotation toward policy-favored industries may offer opportunity.

Main Topics: COVID lockdowns and zero-COVID policy (Priority: 5/5): Hui Shan explains lockdowns are driven by low elderly vaccination rates and fears of reopening, making restrictions a major drag on activity, supply chains, and growth. Property sector downturn (Priority: 5/5): Housing transactions weakened sharply as lockdowns compounded an already stressed property market, reinforcing growth downside and hurting local government revenue, confidence, and upstream industries. Policy response and limits to stimulus (Priority: 5/5): The panel discusses how today’s policymakers are less able or willing to re-lever the economy than in past cycles, due to weaker structural demand and Xi’s longer-term deleveraging orientation. Currency depreciation and monetary policy (Priority: 4/5): Hui notes the yuan has weakened as the PBOC balances growth pressure against Fed tightening, capital flow risks, and inflation, allowing some depreciation while avoiding aggressive rate cuts. Chinese equities and valuation (Priority: 5/5): Kinjer Lau argues Chinese equities are under pressure but much of the bad news is priced in, with valuations below historical norms and upside possible if recession risks are contained. Regulatory crackdown and investability (Priority: 4/5): The discussion frames regulation as a major concern that has moderated since late 2021, with the market moving from announcement to implementation, improving transparency for investors. Political transition and geopolitics (Priority: 5/5): The upcoming 20th Party Congress and Xi’s third term shape policy behavior, front-loading support, increasing anti-corruption caution, and reinforcing a broader decoupling trend with the US.

Key Arguments: Zero-COVID is not simply a choice; low vaccination among the elderly makes reopening politically and socially risky. Lockdowns and property weakness interact, with lockdowns directly depressing real estate transactions and growth. The current policy regime is less inclined toward aggressive stimulus because of deleveraging priorities and longer-term governance goals. Past China stimulus cycles were more effective because structural demand for infrastructure and housing was much stronger than today. The yuan can weaken modestly to support growth, but authorities are unlikely to tolerate a disorderly depreciation. Chinese equities are down sharply, but valuations below 10x forward earnings suggest significant risks are already reflected. Regulatory risk appears past its peak: heavy-handed crackdowns like education are unlikely to repeat, and tightening intensity has eased since late 2021. Sector investing should align with policy direction, favoring semiconductors, EVs, green energy, and industrial technology. China’s strategic investment case remains because it is the second-largest, highly liquid equity market with low foreign ownership. Medium-term growth is likely to average 4%-5%, below previous expectations of 5%-6%, as policymakers trade growth for security and stability.

Data Points: Elderly vaccination rate (age 80+ ): below 60% - Hui Shan cites low vaccination as a reason reopening remains difficult in China. Lockdown index in China at current period: around 40 - Hui compares China’s lockdown severity during the 2022 wave to earlier periods. China lockdown index peak: 80 - Highest severity at the February 2020 peak. Lockdown index elsewhere: 10-20 - Contrast with the rest of the world during the same period. Shanghai port arrivals and departures: lowest point around mid-April - Illustrates supply chain disruption during the outbreak. Property sales Jan-Feb: down 30% year on year - Shows early-year weakness in the housing market. Property sales Mar-Apr: close to 50% down year on year - Lockdowns worsened the property downturn. Chinese equities performance: down about 20% year to date - Kinjer Lau describes the market selloff in 2022. Chinese equities valuation: below 10 times forward P/E - Used to argue downside risk is partly priced in. Valuation relative to history: about 1 standard deviation below historical average - Supports the view that equities are cheap versus norms. Foreign ownership in onshore equity market: less than 5% - Used to support the argument that China remains underowned by global investors. Policy tightening peak: late 2021 - Kinjer says regulatory intensity has moderated since then. Expected medium-term growth: 4%-5% - Hui’s estimate of China’s average growth over the next few years. Earlier expected growth: 5%-6% - Previous consensus-like expectation before structural headwinds intensified. Yuan move versus USD: from 6.30 to almost 6.60 - Hui notes meaningful depreciation in recent days.

Pivotal Quotes: "We are in a perfect storm situation where we have a number of economic and regulation headwinds all going against the market at the same time." — Kinjer Lau: Summarizing the confluence of COVID, property, geopolitical, and regulatory risks facing Chinese assets. "China is still investable" — Kinjer Lau: Core conclusion on Chinese equities despite the regulatory and macro headwinds. "This is not really by choice" — Hui Shan: Explaining why China remains committed to zero-COVID despite global reopening and economic costs.

Implications: China is facing slower structural growth and more volatile policy, but not a lost investment case. Investors should expect selective opportunities, favor policy-backed sectors, and watch for stabilization in lockdowns, housing, and regulation before broad re-rating.