China in Covid 19 limbo creating headwind for the global economy?

In recent days and weeks there have been rumours that China is beginning to consider an easing of its Covid restrictions. As virtually the last country with extreme Covid restrictions, a shift in policy from China would be a major catalyst for the global markets and economy. Whilst the CCP has not yet announced any actual easing, there are hopes that they will soon begin to ease off on some of their measures. Health officials have stated that local governments should not “double down” on restrictions and allow people’s livelihoods and economic activity to remain normal even in the face of increasing covid cases. General activity has shown an increase in flights and covid vaccine uptake across the country which may signal a move towards ending restrictions.

Impact on the markets

The country is set to have one of its worst years of growth in the last 20 years as it deals with the prolonged restrictions. The Shanghai Stock Exchange has fallen by more than 17% and the Yuan has depreciated almost 17% against the USD. This is in the wake of global inflation and recessionary pressures.

A strong China is a very good thing for the global economy, especially with regards to growth economies. Once restrictions do ease, it is expected that Chinese stocks will rally heavily. However, it is not just Chinese stocks that will receive a boost. Australian mining companies and the AUD will likely benefit as China is a large importer of Australian resources. It may also weaken the USD as money flows back into riskier assets and away from the greenback as the general economy begins to accelerate again.

Ultimately, regardless of when exactly, China decides to ease its restrictions it would be prudent to be aware of the potential ramifications as it may provide a strong boost to the equities market and on some aspects of the foreign exchange market as well.