Investors seemed much less optimistic for the
first half of the trading day, with the S&P 500 and Nasdaq both down about
1.5% shortly before noon. The worries revolved around China and its ongoing
Covid-19 surge. Unlike much of the world, China continues to use lockdowns to
counter the virus. Shanghai is dealing with its fourth week of lockdowns, and
now investors are worried that Beijing could be next.
The Shanghai Composite fell 5.1% on Monday,
while Hong Kong's Hang Seng Index was down 3.7%. Barron's
Reshma Kapadia writes that there's no easy fix for
China's Covid troubles as long as it maintains its zero-Covid policies, while
also trying to keep already-high debt levels in check.
Lockdowns in China could exacerbate supply
chain woes and even undermine the Federal Reserve's inflation-fighting
measures. Here's how Reshma describes "China's
conundrum":
It needs to contain Covid but its economy is already fragile—with
restrictions further hitting the consumption and property sectors that power
its economy. At the same time, high debt levels make policy makers wary of
leaning on the type of stimulus the have typically resorted to in times of
stress—namely juicing the property sector and debt-fueled infrastructure
growth. Add in an aggressive economic growth target of 5.5% this year as Xi
Jinping tries to secure a third term in the fall and policy makers have a
Herculean task ahead
Given the weakness in demand already, policy
makers’ infrastructure-led stimulus is unlikely to be enough to offset the
Covid-induced slowdown—a reason TS Lombard economist Rory Green sees China’s
growth possibly coming in under 4% this year—a level that, for China, is close
to a recession.
Read the rest of Reshma's story here.
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