| Ronan Menachem, chief market economist of Mizrahi Tefahot
The experiment currently taking place in China – in the field, not under laboratory conditions – will hurt the world’s capital markets in the short term, but it seems that they will benefit from it in the future. China probably maintained a zero-tolerance policy for too long, even when they already knew that the latest versions of the corona were less lethal. Like the Dutch finger that plugged the hole in the dam, when it was removed from the corona dam, it broke. The writing was on the wall.
This is the reason why it led to a renewed outbreak of the disease, and according to experts, there may be three such rounds during the first quarter of 2023.
Because of China’s importance to the global economy and world trade, this outbreak will reduce the scope of activity and trade within and outside of China – which will only add to the economic recession caused, in part, by the sharp interest rate hikes around the world. Inflation in the world is also still high (although it has started to decrease) and makes it difficult for the global economy.
While China deals with the consequences, there may be a return to point closures and even more (schools, factories, districts) according to developments. No one really knows anything, except that it “guarantees” bearishness in the short term.
The resonance of what happens in China reaches the global markets immediately and can shake them in any direction. However, there are at least two reasons for optimism.
One, that within a few months, after the expected corona waves in China, it will return to normal activity and give a boost to the global economy as well as to the business, consumer and investment sentiment. The second, that the Chinese authorities have a proven ability to support the economy – and indeed we see at the same time as the restrictions are lifted, that the country’s central bank has started to inject large amounts of liquidity into the market and the economy, and is also helping the housing market and the banks. I guess we will hear about more steps in that direction in the coming days.
Also, fortunately for , the inflation there is low (unlike in the West) and also the interest rate has somewhere to go down if necessary.
The critical point is that Chinese President Xi Jinping said that the authorities made a strategic decision to prioritize aid to consumers and households in the country over an all-out war on Corona. This is the news that the capital markets have been waiting to hear since the Western countries did so already a year ago.
Obviously, the rare protests across China against the closures had an impact on the decision. The Communist Party of China has provincial governors, who are obliged to maintain the residents’ livelihood in order to survive in their position. But as soon as the authorities move from zero tolerance towards the corona virus to a policy of living alongside the corona virus, this is important news at the local and global level.
If indeed during the second quarter of this year China will find itself in a situation where it has overcome the wave of sickness and at the same time the interest rate hikes in the world will come to an end – which means that they will be able to contain inflation – from an economic point of view this could be a positive turning point, which will be reflected in the markets later this year as well.
The writer is Chief Market Economist of Bank Mizrahi Tefahot. This review is not intended to be a substitute for investment marketing that takes into account the data and the special needs of each person.