Covid/China: fear of contagion still worries world markets 

If you believe the spread of Covid-19 has ended, think again. In China the number of coronavirus cases has more influence over markets than comments from US Federal Reserve governors.

The effect of China’s zero-Covid policies, once largely confined to local stocks, is spreading again to markets worldwide. Many investors had hoped China was ready to start reopening, but the worst case may be about to materialise.

In its capital, cases have hit a fresh record high. Beijing shut down public spaces such as shopping centres and parks on Tuesday, while many other Chinese cities have restarted mass testing for Covid. A nationwide surge in cases is nearing its daily infection record of the year.

Beijing has warned it faces its most severe test of the pandemic. That is worrying as such warnings have previously preceded strict lockdowns. More than 40 Chinese cities are currently under restrictions. Analysts estimate these would affect nearly one-fifth of total manufacturing output.

An even bigger problem is that Guangzhou is the epicentre of the latest surge of new cases. The southern metropolis is the country’s manufacturing hub. Moreover, the area has become home to so many factories spanning industries including electronics, cars, telecom equipment and steel it is referred to as the world’s production centre.

Should the current surge in cases prompt a citywide lockdown in Guangzhou comparable to that in Shanghai earlier this year, global supply chain disruptions will exceed those experienced in the past year. Beijing has already ordered a five-day lockdown for Guangzhou’s most populous district Baiyun. A worst-case scenario for all concerned cities could affect more than $1tn in output from China.

No surprise that shares of US companies with important exposure to China have suffered following the announcement of rising new cases. Tesla shares lost nearly 7 per cent on Monday. Its fast-growing sales in China, which last year accounted for a quarter of total revenues, hit a new monthly high in September.

Hopes that the Fed’s hawkish views on inflation could soon moderate have reignited interest in world equity and bond markets. Yet prices of commodities such as crude oil and copper quickly reversed as news spread of China’s lockdowns. China is the world’s second largest consumer of oil and the most important for refined copper. Its struggle with Covid will remain the world’s problem too for a while longer.

Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to sign up.

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