(Bloomberg) -- Investors who are betting on a sustained rebound in Chinese equities are getting ahead of themselves, according to TS Lombard.
The optimism surrounding China’s shares is growing but the nation’s Covid Zero policy remains a drag as it curbs consumer spending, which is a key driver of growth, analysts Larry Brainard and Jon Harrison wrote in a note Monday. The firm lowered its call on Chinese stocks to neutral from moderately positive.
The recent recovery in China’s shares has spurred debate on whether the worst is over after the authorities pledged to ease up on a tech crackdown while employing mass testing to prevent city-wide lockdowns. The benchmark CSI 300 Index has defied a selloff in global equities to rally around 13% from a low reached in April.
“What the equity bulls miss is that what drives the economy is the Chinese consumer, not the unending rollout of yet more fiscal stimulus measures,” the analysts wrote. “The legacy of the damaging and personally stressful Shanghai lockdown and now mass testing are keeping the economic recovery in limbo by eroding consumer sentiment and sending savings soaring.”
Contrary to expectations of a rebound in the coming months, China’s economic outlook will remain uncertain until the Covid Zero policy is scrapped.
The only shift in China’s virus rules is to replace lockdowns with mass testing, which equates to a doubling down on the policy, with testing requirements expected to crowd out fiscal spending and other initiatives, the analysts wrote.
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