China Comes to its Senses

Stocks are limping into year-end (Dow +113 points, S&P 500 -.14%; Nasdaq -.9%). Tech and internet stocks are leading to the downside along with Tesla, which cut production guidance. And while China’s reopening buoyed Asian markets, terrible winter weather back east wreaked havoc with airline stocks. The bond is market is selling off as well, allowing yields across the maturity spectrum to float higher.

China’s autocratic government announced steps to walk back its misguided Covid Zero policy. The country’s health commission downgraded the Covid virus from “Class A” to “Class B”, meaning that it will now be less strictly managed. Beginning on January 8th, arriving international travelers will no longer be required to quarantine. And the government will remove limits on the number of flights and passengers allowed into the country. Covid Zero’s incredibly strict social controls have battered the Chinese economy and more recently began to cause civil unrest. So the emphasis will now shift from prevention, to treatment. Shanghai authorities, according to the Wall Street Journal, told Covid-positive residents they only need to self-quarantine for seven days, even if they continue to test positive.

This turnabout in policy—assuming it sticks—likely removes a speedbump for global economic growth. This should hasten the healing of supply chains and allow factories to reopen. That’s why Chinese stocks climbed 1% last night, WTI crude oil rose 1.5% and copper clawed back 2%. That said, two prominent US companies with large manufacturing operations in China are struggling to get product made. Tesla (TSLA) is down 8.5% today after cutting production guidance in its Shanghai factory. According to Bloomberg, a wave of Covid infections caused the company to suspend production for an extended period. Apple (AAPL) is down 1.2% on iPhone supply concerns following major work disruptions at Foxconn factories. China’s political and social environment has been less than stable.

US home prices continue to fall, reversing a portion of post-Covid gains. A reset in prices makes sense when one considers that the median price of an existing home shot up nearly 50% between March 2020 and June 2022. Government stimulus combined with ultra-low interest rates super-heated prices, which at one point were rising at a 20% annual rate. That valuation bubble has burst. According to the Nat’l Association of Realtors, the national median home price has fallen 10% since June. Incidentally, that figure matches Zillow’s price estimate for my house.