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China stocks: party and funeral shares make a dissonant rally

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“Shut up and take my money” was once the attitude of Chinese retail investors towards providers of fixed-income wealth management products. Now they are scrambling to withdraw funds from the Rmb29tn ($4.2tn) market as Beijing ends zero-Covid policies.

Investors believe equity markets offer better returns. Are they right?

Purchasers have long considered the savings products sold by big Chinese banks to be almost risk-free. But even guaranteed returns cannot forestall a run triggered by the fear of missing out, rather than by panic. Some fund managers, overwhelmed by redemptions, have suspended withdrawals.

The depressed stock market has been rebounding. The mainland’s benchmark CSI 300 index trades at 13 times forward earnings, a big discount to global peers. Rallies in the shares of liquor producer Kweichow Moutai and carriers Air China and China Southern Airlines make sense. Drunken parties on holiday islands are resuming.

But there is a darker subtext. Shares in death care services companies have surged 60 per cent surge since November. Hot stocks include Fu Shou Yuan International Group, China’s biggest cemetery operator. Pharmaceutical companies are also up strongly.

This points to surging infection rates and trouble ahead for the Chinese economy.

Citizens made 22,000 visits to fever clinics in Beijing on Sunday, a 16-fold increased from the previous week. Strict isolation policies mean that cumulative cases are extremely low, even allowing for under reporting. Collective immunity must be correspondingly weak.

A growing number of factory workers are sick. There are around 450,000 manufacturing businesses in China. Larger ones account for nearly two-thirds of companies listed on the Shenzhen Stock Exchange. Until now, lockdowns limited capacity losses to certain cities. They will now become widespread.

Sooner or later, China had to reopen its economy. Given the lack of vaccines as effective as western mRNA jabs, this made a large outbreak inevitable. Local investors are being optimistic in anticipating a swift return to normality.

Small and medium-sized businesses, whose stocks underpin wealth management products, are meanwhile suffering a significant withdrawal of capital.

Given time, collective immunity will rise and occasional bouts of coronavirus will become routine for the Chinese as for Europeans and Americans. Near term, investors should brace for further dislocation.

The Lex team is interested in hearing more from readers. Do you agree with our thesis on China’s recovery from Covid? Please tell us what you think in the comments section below.

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