Why China’s COVID policies are rattling investors again

iShares China Large-Cap ETF
FXI,
-1.71%
which offers exposure to large companies in China by tracking the FTSE China 50 Index
XIN9X000,
+0.86%,
booked a weekly loss of 2.9%. Meanwhile, shares of the SPDR S&P China ETF
GXC,
-1.67%
booked a weekly loss of 3.2%, while the Xtrackers Harvest CSI 300 China ETF
ASHR,
-1.15%
shed 2.3% for the week, Dow Jones Market data showed.

See: As COVID cases rise, China locks down despite criticism

Earlier this month, investors applauded as the Chinese government announced tweaks to its “zero-COVID” policy, which relies on mass testing and quarantines to stem outbreaks. The move raised a glimmer of hope that the government was considering easing its draconian pandemic restrictions.

For example, the government reduced the amount of time international travelers entering the country must spend in quarantine, and airlines will no longer face a suspension of flights if they carry COVID-positive passengers. The same shortened quarantine period also applies to local people who are identified as “close contacts” with known or suspected positive COVID cases. Mass testing is also forbidden unless it is unclear how infections are spreading in an area.

However, as the country reported a record number of daily COVID infections Thursday, cities such as Beijing and Guangzhou were once again locking down apartment compounds, forcing residents from leaving for at least a few days. 

Municipal governments have not announced citywide lockdowns yet, and it is unclear how many people are affected at a city level. Beijing has a population of 21.6 million, while Guangzhou, a major transportation hub in the south, has nearly 19 million residents. 

Oil futures have fallen sharply, with the U.S. benchmark
CL.1,
+0.35%
down nearly 12% so far in November. The selloff has been blamed partly on concerns continued restrictions will keep a lid on crude demand from one of the world’s largest energy consumers.

Read: China cuts bank reserve requirements as lockdown fears spark panic in Beijing

China’s central bank Friday cut its requirements for how much deposits local banks must set aside against the credit that they extend, boosting lending to households and businesses and trying to stimulate the world’s second largest economy in defiance of a global trend toward monetary tightening.

“Ultimately, the authorities will have to accept a much higher level of COVID cases while attempting to reopen the economy particularly coming into the all-important Chinese New Year which is in January 2023 – much earlier than previous years,” wrote Sean Darby, global equity strategist at Jefferies.

Darby thinks that Chinese banks have plenty of cash on hand because consumers just aren’t spending. This latest decision by the PBOC to cut its reserve requirement was meant to “demonstrate there is little to hold back the banks from lending,” Darby said in a Friday note.

U.S.-listed Chinese stocks fell on Friday with the Nasdaq Golden Dragon China Index down 3.3%. Internet stocks including Alibaba
BABA,
-3.82%,
Baidu
BIDU,
-3.75%,
JD.com
JD,
-5.32%
and NetEase
NTES,
-1.50%
declined by over 3% each, and have lost at least 30% so far in 2022.

The broader U.S. stock market was little affected this week by COVID developments in China with three main indexes finishing the shortened week with gains. The S&P 500
SPX,
-0.03%
was up 1.5% for the week, while the Dow Jones Industrial Average
DJIA,
+0.23%
booked a weekly gain of 1.8% and the Nasdaq Composite
COMP,
+1.42%
was up 0.7%, according to Dow Jones Market data.

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