Omicron's Asian Effects Are More Severe for Investors

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With memory chip output already disrupted at the Chinese factories of both Samsung Electronics (KR:005930) and Micron (MU) , we’re seeing that the Omicron strain of Covid-19 will likely hit Asia worse than the West. But it is the commercial disruption that is the major distinction, rather than the health threat.

China has already imposed a strict lockdown at Xian, a metro area of 12.9 million people. Micron says its production of the DRAM memory chips used in data centers at its Xian factory will likely face delays, at a time the shortage of semiconductors is disrupting production of a wide range of goods, including cars, computers and consumer tech items such as smartphones and videogame consoles. Samsung is scrambling to react to slower production of NAND flash-memory chips that go into data storage as well as tech gadgets.

Hong Kong, meanwhile, has banned flights for two weeks from eight nations: the United States, the United Kingdom, France, Canada, Australia, India, Pakistan and the Philippines.

The city, once the financial capital of East Asia, is surrendering that mantle. Already, travelers must spend three weeks in tight, expensive hotel-bound quarantine when returning from abroad.

Fitch warns that the city is increasingly unpalatable as a base from which to serve Asia. This tightening of restrictions for international arrivals creates “further obstacles to the territory’s ability to serve as a regional headquarters for foreign multinationals,” the ratings agency says in a note warning of new risks for the Hong Kong economy.

China and Hong Kong both persist in a “zero-Covid” strategy that is ultimately futile unless they never open their borders again. But the situation temporarily suits both the puppet government officials in Hong Kong and their Beijing masters, making foreign travel impractical and phenomenally expensive at a time record numbers of Hong Kongers are emigrating out of the city. The city’s population fell 1.2% in the last census, a record drop, as I explained when the numbers came out.

The situation doesn’t always suit members of the government themselves, who break the rules when they feel like it, while punishing pro-democracy activists with prison time for violations. The annual memorial of the Tiananmen Square massacre has been banned the last two years, ostensibly on public-health grounds. But an illegal 192-person birthday party went ahead for Hong Kong’s delegate to the Chinese Communist Party’s National People’s Congress, Witman Hung. There was unmasked karaoke singing and flowing red wine at a tapas bar – but none of the social distancing required by law, which stipulates only six vaccinated people can eat together. At least 13 senior members of the puppet government, including the police chief, and 19 members of the joke “patriot’s only” legislature attended, and were forced into quarantine after positive tests among those attending.

Officials have offered the “I’m sorry for you” kind of non-apology, with similar-wording statements that they “apologize to the community for the additional burden to the anti-epidemic work.” Not for breaking the rules. Chief Executive Carrie Lam, the city’s leader, criticized the senior management of airline Cathay Pacific (HK:0293) and (CPCAF) for lax oversight when a flight crew member broke quarantine to dine with his father, but has accepted no blame as the boss of these officials.

Meantime, the Hong Kong government has shuttered almost all sports venues, including tennis courts where opponents stand distanced on different sides of a net. Public transport that is crammed at rush hour continues, but the police keep raiding pro-democracy restaurants and banning customers from visiting them for tiny infractions of the Covid rules.

The Hong Kong stock market was the world’s worst major exchange last year, with the Hang Seng Index losing 14.1%. Already, the economy was due to expand 3% in 2022 but even that slender improvement is under threat.

The city has a recent high of just 25 Covid cases, recorded on December 25, a minute fraction of the caseload in many Western nations. It persists in walling itself off with the idea of opening the border to mainland China, where zero-Covid will likely remain in place until President Xi Jinping wins an unprecedented third term at a major Communist Party meeting in November. But even the Hong Kong-Macau-China borders remain highly restricted, with “Covid bubble” plans pushed back every time Covid rears its head again.

Chinese stocks also lost ground in 2021, with the CSI 300 index down 5.2%. Besides total lockdown of Xian, there has also been a partial lockdown at the port city of Ningbo, slowing the processing of containers in a way that could lead to higher freight rates. Recent signs of easing in Chinese supply-chain bottlenecks could therefore prove “fleeting,” Nomura says in a report on the Omicron threat to Asian trade. Zero-Covid could once again “result in significant supply-chain disruption,” the investment bank states, compounded by trade seizing up in Southeast Asia. The net effect will likely add to inflation in the developed world.

The combination of low vaccination rates in emerging markets in Asia with China’s super strict rules will, Nomura expects, “result in both demand- and supply-side effects in the coming months.”

Here we go again, in other words…

Nomura expects China’s growth to slow drastically, making a non-consensus call that it’ll drop to 2.9% in Q1 and 3.8% in Q2, “before Beijing’s pain threshold is triggered.”

The situation looks brightest in countries like Singapore and Malaysia, where vaccination rates are high and the governments are embracing a “live with Covid” strategy. Besides China and Hong Kong, the Philippines will likely be held back by its low rate of vaccination, while there are major macro risks in India and Indonesia as well. All three nations have vaccinated less than half the population.

India, which holds local elections in February, has temporarily banned political rallies, while some of the country’s most-populous states have imposed nighttime and weekend curfews. Indonesia and the Philippines have both raised the alert level in their capitals, disrupting life once again, hampering movement, and hurting service businesses in particular. Thailand, desperate to see international tourism resume, has suspended quarantine-free travel, and South Korea has re-imposed a 10-day quarantine for flight arrivals.

Only in Australia (76.4%), Hong Kong (76.1%) and Singapore (49.9%) does Omicron account for the majority of Covid cases. That indicates the next wave has yet to take hold in emerging Asia. The policy responses have so far been not as strict as previous rounds of Covid infection, but we are still working through the ramifications that those trade disruptions produced.

The risks are all on the horizon. Factories could well be shuttered again, trade will certainly back up, the Lunar New Year holidays, celebrated in greater China, Vietnam and Korea, could spread the virus broad and wide. While Omicron is quite clearly milder than other forms of the disease, a disproportionate response to its severity could well shut life down once again for Asia’s economies.

We’ve seen already in the West at backed-up ports, on quietened factory production lines and with empty shelves, what the result will likely be.