Strategy Note /

China protests: The start of something big?

  • Zero-Covid protests spread; response could include lockdown loosening, as well crackdown, and scapegoating of officials

  • Differences with post-Tiananmen Square 1989 protests: social media, lockdown anger, multi-city, Xi Jinping mentioned

  • China's Covid spike and protest disruption hurts globally. Its equities are cheap but still in for a very bumpy ride.

China protests: The start of something big?
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
28 November 2022
Published byTellimer Research

At the time of writing, protests in China are only two days old, not uniform in their target, and a very long way from a scale that equates to meaningful regime risk. Crowds appear to be in the hundreds and thousands. For comparison, crowds of up to 100,000 gathered in Tiananmen Square in Beijing alone for weeks between April and June 1989.

Reports of protests in China have spread from social media to mainstream media and the target of protests has spread from alleged delays to firefighters dealing with a high-rise fire in Urumqi, the capital of the far western region of Xinjiang, to other cities, including Shanghai, and to wider issues like censorship and the government of Xi Jinping.

It may be very premature for this sort of report but history is replete with examples of the seemingly resilient political systems, authoritarian or democratic, withstanding long-standing stresses until they abruptly do not.

At this stage, recent precedent would suggest that protests will be met with a combination of some continued loosening of zero-Covid, a crackdown on individuals that continue to participate in protests, and, potentially, the scapegoating of Communist Party officials at the local level.

In this report, we review the contradictions inherent in China's zero-Covid policy, the latest Covid infection data, comparisons of the context of these protests with that before and after Tiananmen Square, the sheer scale of China in global economy and equity markets, the reliance on Chinese intermediate inputs of those countries regarded as candidates for 'China + 1' manufacturing, and the discount in Chinese equities relative to the US and emerging markets.

Zero-Covid policy contradictions

At a minimum, the protests shine a light on the contradictions in China's zero-Covid policy and its continuing threat to growth forecasts:

  • Zero-Covid lockdowns minimise infection but thwart growth and fuel social frustration, while loosening zero-Covid spikes infections amid new variants and in the absence of mRNA vaccine deployment,

  • Zero-Covid policy, portrayed as a successful way to manage Covid, and reliance on homegrown vaccines, portrayed as a demonstration of China's independence, appear to be policies closely linked with Xi Jinping and the Communist Party leadership, but maintaining zero-Covid policy when the rest of the world has moved away from lockdowns – reinforced, perhaps, by broadcast images of crowds at the football World Cup – discredits the leadership.

China cases spike after more 'pragmatic' zero-Covid policy

Comparison before and after Tiananmen

Similar to the era preceding the Tiananmen Square protests in 1989:

  • Macroeconomic growth has slowed sharply – annual real GDP growth dropped from an average of 12.0% over 1984-88 to 4.0% in 1989-90, compared with the drop from 6.7% over 2015-19 to 4.5% over 2020-22; and

  • Students again appear to be a key driver behind protests, and, specifically, in this case, the defiance of official warnings, and the broadening of the message from the Urumqi fire and zero-Covid to broader criticism of the government.

Unlike sporadic protests since Tiananmen Square, these protests:

  • Follow months and years of widespread frustration and economic hardship from zero-Covid lockdowns;

  • Follow a recently concluded renewal of Communist Party leadership under General Secretary Xi Jinping, who could remain in charge until, potentially, 2032;

  • Have spread to multiple cities – from Urumqi to Beijing, Nanjing and Shanghai; and

  • Occur in an era where social media, albeit with restrictions by global standards, has overtaken state media as a source of information and views, and has overtaken word of mouth as the method of mobilsation and organisation of support for a cause.

China's Paramount Leaders

Global investor implications

Apart from China domestic political risk, should they escalate massively, the protests focus investor attention on three issues.

  1. The sheer scale of China as a percentage of the global economy and trade, and commodities and equity markets.

  2. The interconnection of Chinese intermediary inputs with most of the candidates for China + 1 manufacturing.

  3. The discount in Chinese equity valuations relative to large global emerging market peers suggests much concern already may be priced in.

China's size (under-represented in global equity indices)

China deeply interconnected with Asian EM manufacturing

China and HK equities cheaper than US and EM peers

Summary of China investment case

China summary of top-down equities positives and risks

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