Strategy Note /

China's Shenzhen lockdown impact

  • Shenzhen lockdown for at least a week and more lockdowns likely as Chinese authorities stick to a "zero-Covid" strategy

  • Shenzhen alone is 9% of exports and 2.6% of GDP in China, and 3.2% of sea containers and 2.2% of air cargo globally

  • Downside risk for China growth implies greater burden on policy stimulus and more risk of punitive corporate regulation

China's Shenzhen lockdown impact
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
14 March 2022
Published byTellimer Research

China's decision to lockdown Shenzhen for a week is unlikely to be the last in the current round of the zero Covid strategy (to which the authorities remain committed). The spread of lockdowns entails downside risk to China growth, greater burden on policy stimulus, higher risk of new regulations to pursue the "common prosperity" agenda (particularly if the government is unwilling to cut back on its target of 7% growth in military spend), and greater disruption to the global supply chain, particularly for Technology hardware.

Shenzhen key in China economy and Global supply chain

China's Premier issued a real GDP growth target of "around 5.5%" in 2022, at the start of the National People's Congress (legislature) on 5 march. This compared to "over 6%" for 2021 in the corresponding meeting a year earlier. The IMF forecasts 4.8% in 2022.

Sticking to a zero Covid strategy and imposing lockdowns will put more pressure on the government to engage in policy stimulus. The real interest rate is positive 2%, suggesting room to cut policy rates further. But fiscal deficit is already heading for an almost 7% deficit, according to the IMF, after 7.5% in 2021.

The policy alternative to monetary and fiscal stimulus is to squeeze the corporate sector again. That may dash hopes that the worst has passed on new regulations, which shift value from shareholders to the government, and is a material risk to our positive view on China Tech stocks, which are cheapest in EM in terms of value relative to history.

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