China Reopening: Much Less Than Meets The Eye.

The China reopening story is the most powerful market narrative going on today. At least for now, it’s more powerful than any Fed analysis, the prospect of a recession, and even lower energy prices in terms of what’s driving investor behavior.

Of course, the key word is “narrative.” It’s a powerful story but that does not mean the story is true. If it affects investor behavior, then investors have to pay attention to avoid getting run over by bull market sentiment.

Still, whenever a narrative diverges from reality, the reality always wins. But it can take time.

This story gives a good account of the narrative. China has reopened its borders with the outside world. Tourists, family members, and businesspeople are flocking in after being mostly shut out for several years.

At the same time, China has ended its failed Zero-Covid policy. That policy consisted of extreme lockdowns, massive testing programs (several times per week for most people), transportation shutdowns, and quarantine concentration camps. These extreme policies could delay the spread of the virus in certain localities, but it came at an enormous economic cost and was socially non-sustainable. That was demonstrated on November 24, 2022, when riots broke out throughout China in opposition to the program.

China is now letting the virus rip through society and trying to reboot its economy at the same time. Despite the reopening cheerleading on Wall Street, China’s new policy will fail. There are several reasons for this.

China will suffer over 450,000,000 million infections and perhaps as many as 2 million deaths from COVID. That’s a different social burden than Zero-Covid but it’s a burden nonetheless. China does not have the treatments or hospital beds to deal with an outbreak on that scale.

The second reason is that the infection and fatality estimates above are based on experience in the U.S. and Europe. But China may have a different and worse experience if the virus mutates and recombines in ways that make it more lethal or contagious.

Finally, the Chinese economy is suffering for reasons that have nothing to do with COVID, including a global slowdown, supply chain disruption, rising interest rates, dollar shortages, bad debt, and a collapsing real estate sector. China’s economy may already be in a recession, which is a shock for the world’s second-largest economy and the “factory of the world.”

The China reopening rally may continue for a while. But in the end, the reality of a weak economy and a global recession will have its way.

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