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Client Update - 20th May 2022

I thought it would be good to take a short break from the inflation / interest rate issues within the UK and US markets and for this week cast our eyes over to Asia, with particular focus on China and the ongoing COVID lockdown policy. When Covid erupted out of central China in January 2020, Hubei province and its capital, Wuhan, were quickly locked down, with the rest of the country soon following. Right now, in 2022, the Japanese brokerage Nomura estimates that 41 cities with a combined population of 290mn (responsible for about 30% of national economic output) were under full or partial lockdowns as of 10th May 2022.

Yet there are crucial differences between the successful nationwide clampdowns at the start of the pandemic in 2020 and the current series of rolling closures. The 2020 measures were a relatively short, sharp shock. They coincided with the annual lunar new year holiday — China’s equivalent of the western Christmas and New Year break — during which many manufacturers routinely close for two or three weeks. After an extended holiday, most of the country reopened within a month. Only Hubei and Wuhan were subjected to longer restrictions, and even these were lifted by late March. The impact on growth mirrored the brevity of the closures, with a 6.9% year-on-year decline in first-quarter economic output, followed by a steadily accelerating recovery for the rest of the year. By contrast, this spring’s lockdowns have been ad hoc and open-ended. They are ultimately controlled by low-level district or neighbourhood officials who respond — often harshly — to sometimes contradictory policy signals from the top of the Chinese Communist party.

At the May 5th 2022 meeting of the Chinese leading party’s most powerful body, the Politburo Standing Committee, President Xi reiterated that he would not tolerate any let-up in the effort to eliminate all Covid cases from China. “We won the battle to defend Wuhan,” Xi said at the meeting, according to state media. “We will certainly be able to win the battle to defend Shanghai.” Since the start of the pandemic, such martial rhetoric has been a common refrain for Xi, who has embraced the crisis as an opportunity to prove himself a leader in the war on Covid. He added a warning: “Relaxing prevention and control measures will inevitably lead to large-scale infections, serious illnesses and death, and will seriously affect economic and social development.” The admonition was a nod to his administration’s success in limiting official Covid deaths to just a few thousand — the US has suffered nearly 1mn.

This does, however, also highlight the government’s failure to vaccinate the elderly and other vulnerable people. A similar omission in Hong Kong led to a catastrophic outbreak there this year in which more than 9,100 people died, most of them elderly and unvaccinated. On May 9th, researchers at Fudan University in Shanghai estimated a similar surge across China could kill as many as 1.6mn people in just three months. The highest profile, and most controversial, Chinese lockdown has been the one imposed on all of Shanghai’s 26mn residents since April 1. Within hours of Xi’s comments on Covid control last week, police and enforcement officials in areas of Shanghai were imposing some of their harshest measures to date — including the forced transfer of all residents in a given building to centralised quarantine if even one of them tested positive. Many residents have complained of being unable to receive food deliveries. Our long-term investment opportunity in Asia is tempered by the short term pain being experienced on the ground in China. In 2022 it has been difficult to separate investment opportunities from humanitarian crisis, but we hope that in the longer term our investment teams’ interest and perseverance in Asian equities will outperform developed markets that are starting to struggle with prolonged inflationary pressures. Please do have a good weekend.

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