China Puts Megacity Chengdu Under Lockdown As Zero-Covid Intensifies

Asian stocks tumbled after China announced the metropolis of Chengdu would lock down its 21 million residents as authorities battled a new Covid-19 outbreak.

In China’s Western region, officials in Chengdu launched massive Covid testing and requested residents to abide by “stay home in principle” from 6 pm on Thursday. The new measure allows one person per household the ability to procure essential items at places like supermarkets. 

“The current state of epidemic control is abnormal, complex, and grim,” officials said, adding the lockdown aims to “decisively arrest the spread of the outbreak and guarantee the health of all citizens.”

Chengdu is the biggest city to shut down since Shanghai’s lockdown earlier this year. The move to lock down Chengdu will generate even more macro instability for the world’s second-largest economy. It accounts for 1.7% of the national economy and is one of southwestern China’s most important manufacturing hubs. 

As the capital of Sichuan province — the 6th-largest province in terms of annual GDP — the metro area is home to 96 listed companies in the automobile, aerospace, IT, machinery, and pharmaceutical industries. 

Automakers, including Toyota Motor Corp. and VW China. Foxconn Technology Group, the world’s largest assembler of Apple Inc.’s iPhones and other devices. All have manufacturing facilities in the city. 

The lockdown was unexpected and caught investors off guard: Hong Kong’s Hang Seng Index slumped almost 2%, and CSI 300 Index dropped by nearly 1% to its lowest in three months. 

Some US-listed Chinese stocks declined on the lockdown news. Alibaba traded 2% lower in the US premarket, while EV stocks such as Nio, XPeng, and Li Auto were down 3.4%, 3.1%, and 2.2%, respectively. 

A spillover of pessimism from China leaked into European luxury stocks after HSBC analyst Erwan Rambourg downgraded LVMH, Hermes, Richemont, and Swatch to a “hold” from “buy.” Rambourg wrote in a note he was more cautious about the short-term industry outlook, and valuation at these levels didn’t make sense. 

Analyst commentary (provided by Bloomberg) was overwhelmingly negative due to the uncertainty zero-Covid produces for the Chinese economy.

Bloomberg Intelligence, (Marvin Chen) 

• “China’s Covid-zero policy will continue to be a risk for markets and sporadic lockdowns mean any reopening recovery will likely be a bumpy one” 
• “Local governments may ramp up efforts to contain rising Covid cases ahead of the 20th party congress” 

Union Bancaire Privee, (Vey-Sern Ling) 

• Sporadic Covid-19 lockdowns such as this will pressure already-weak economic conditions in China but we do not expect the Covid-zero policy to shift substantially ahead of the 20th party congress in October” 

AutoML Capital, (Rebecca Lim) 

• “This worsens the worry of China’s economic slowdown, deepening of property crisis and even contagious to banking crisis if bad-loan continues” 
• The “stringent zero-Covid measures have been enforced for more than 2 years and the wider economic environment will have a bigger impact”

All residents in the southwestern Chinese city will be confined to their homes until they test negative for Covid. There was no guidance from officials on how long the lockdown will persist. 

Also, in the Nanshan district in Shenzhen, tighter Covid measures beginning today through Sunday will close indoor public places, including cinemas, gyms, and bars, and halt in-person tutoring services to contain an outbreak. 

New lockdowns will pressure Beijing’s economic planners as the economy slips into the abyss as a worsening property market slowdown is causing turmoil among developers. 

China’s playbook to unleash stimulus primarily focused on infrastructure spending might not be enough to counter Covid lockdowns and a property market slump.