Let’s keep our fingers crossed for China

SA has not done nearly as well with its Covid-19 vaccination drive, but it has at least done reasonably well with older age groups, where official figures are that 71% of those over 60 are vaccinated against Covid-19 (3.9-million people) and 66% of those aged 50-59.

Contrast that with China, where the low vaccination rate among elderly people — along with the poor efficacy of the vaccines that have been used — are among the key risks weighing on efforts to move away from the country’s zero-Covid policy. This draconian policy sparked unprecedented and widespread protests in China last weekend. In the wake of the protests certain cities that were under lockdown have begun a partial reopening.

Signs are that President Xi Jinping’s regime is looking to retreat from the zero-Covid policy, which relies on lockdowns, travel restrictions, mandatory testing, centralised quarantine and other restrictions to crush the virus wherever it appears.

The rest of the world has reopened as a combination of natural immunity and vaccination has reduced Covid-19’s severity and limited its spread. China’s problem after three years of zeroCovid policy is that it does not have that, especially given that it declined to import the foreign MRNA vaccines (such as the Pfizer one that SA has used extensively), which have proved more effective than its home-grown vaccines, notably Sinovac.

China’s reopening is therefore fraught with uncertainty about the spread of the virus and how the country will cope. But so too is the prospect that China may hold back from reopening, despite the toll the policy has taken on its economy, which is expected this year to grow at just 3.2% — the lowest in three decades and well below its 5.5% target, reflecting not just the Covid-19 lockdowns and the damage they have done to consumer confidence and supply chains, but also the fallout from China’s ailing property sector.

It is not just China that faces high levels of uncertainty and risk — so too does the region and the global economy in which the world’s second-largest economy is such a major factor.

IMF chief Kristalina Georgieva warned in a speech in Singapore last week of “exceptional” uncertainty, saying the way in which Beijing calibrated its Covid-19 strategy to manage the economic effect would be crucial.

There have long been worries about the global impact of China’s economic policy pivot of recent years, which has been towards a more inward-looking, state-led model. That has added to concerns about its Covid-19 path.

For SA, China’s fortunes and the manner and pace of its reopening matter a great deal. China is our single largest trading partner. It is particularly important as a destination for our metals and minerals directly but indirectly drives the commodity price cycle globally. With the commodities boom having been a factor supporting SA’s public finances and its economy, the outlook is one to watch closely.

China’s prospects also affect global economic prospects and drive global financial market sentiment, as was evident last Monday when markets tanked after the weekend protests.

However, sentiment towards emerging market assets generally had been picking up during November, in part on hopes that China might be trying to find a way to walk back from zeroCovid. Any sign that it will do so would be positive for commodities and for global markets, and provide upside in a global economy facing plenty of downside risk.

Among the relative optimists is Bank of America Securities, which in a note has taken a “constructive” view on metals and mining in 2023, arguing that a rebound of China’s economy on a more pragmatic zero-Covid policy could help support the prices of base metals, as well as gold and iron ore, along with other factors such as a less aggressive US Federal Reserve, which might limit dollar strength, and the prospect that Europe might get through the worst of this winter’s energy crisis.

The bank sees demand for metals and minerals being held up by low stock levels and the energy transition, hence its “out of consensus” view that mined raw materials will rally in 2023. But while SA might derive benefit, its economy also faces the prospect of recession in the US, the euro area and the UK as central banks continue to battle inflation.

With SA’s economy expected to weaken sharply next year, we have to hope for good news from China at least.

FOR SA, CHINA ’ S FORTUNES AND THE MANNER AND PACE OF ITS REOPENING MATTER A GREAT DEAL