The author is the chief economist of the Bank of Singapore

How long can China last? Zero Covid Policy? The choice made by Beijing is one of the biggest wild cards in 2022.

The consensus is that China’s position will ease after the Winter Olympics in February. After the sharp economic slowdown last year, this will boost consumption and stabilize the economy. But Beijing is more likely to maintain its current strategy of strict blockade and closure of the border before the end of 2022. Therefore, China’s strict control will continue to affect global financial markets.

To understand why, consider China’s calendar of major events. This year, the lunar holiday falls in early February. At that time, Beijing will host the Winter Olympics before the National People’s Congress convenes next month. If the Omicron epidemic subsides before the end of March, the government will have a clear window to relax pandemic measures and reopen the country.

Reducing restrictions as soon as possible will support Beijing’s efforts to boost the economy. Last year, China experienced a V-shaped rebound, and GDP may grow by nearly 8% in 2021. But since the summer, growth has slowed sharply. Domestic consumption has been hit by strict lockdowns to contain new Covid-19 cases. Industrial production was affected by power outages.Real estate investment is suppressed Regulatory restrictions Real estate developers and infrastructure investment have been constrained by slow local government borrowing.

In December, the People’s Bank of China responded by reducing the reserve requirements of commercial banks to release liquidity.Base year Loan preferential interest rate For the first time in the past two years, the government’s Central Economic Work Conference promised to provide more financial support. An early end of China’s zero coronavirus policy will help further promote current economic activities, giving the economy a good opportunity to grow at an annual trend growth rate of 5.5% in 2022.

But Beijing is unlikely to abandon its strategy after the National People’s Congress in March. Instead, China will maintain its position until the 20th National Congress of the Communist Party of China in November.

The next conference is an important milestone for China and is held every five years.This year’s event will be particularly important because it will confirm whether President Xi Jinping will take office Third term.

If it is possible for Beijing to relax its policies before November, it would be surprising. Its strategy keeps the death toll at an impressively low level, but reducing exposure may limit the immunity of the Chinese population. In addition, the Omicron coronavirus variant may test the efficacy of the Chinese Covid vaccine. If Beijing abandons its strategy in the next few months, it may cause a widespread outbreak of the new crown virus before the National Congress.

Therefore, investors should be prepared for the continued strict blockade and border closure in China throughout the year. The impact on the global market may be huge.

First, China’s consumption will continue to be sluggish. By 2022, the country’s GDP growth may be lower than its trend rate, thus limiting the demand for commodities. The absence of Chinese tourists will also continue to affect economies in the Asia-Pacific region that rely on tourism.

Second, China’s trade surplus may remain at a record level, which is good for the renminbi. During the pandemic, Chinese exports were driven by strong foreign demand, while imports were suppressed by slowing domestic consumption. In 2022, as the Federal Reserve ends quantitative easing and considers raising interest rates to combat inflation, emerging economies will face a stronger U.S. dollar. But supported by China’s external surplus, the yuan may remain stable against the dollar.

Third, the recycling of China’s record trade surplus should help keep global bond yields low. This is especially important for the stock market in 2022.

As yields remain at historically low levels, the stock market soared during the pandemic. But investors are now worried that if inflation does not subside, the bond market may plummet. Paradoxically, Beijing’s zero Covid strategy may benefit the risky assets here. By restricting consumption and imports and maintaining a high trade surplus, China’s containment stance will enable its financial institutions to continue to purchase U.S. Treasury bonds, thereby depressing foreign government bond yields.

Some investors hope to withdraw from China’s strict virus control as soon as possible. But if the official does not make any changes before the end of the year, the performance of the global market may be unexpectedly better.