China has tightened Covid-19 measures to combat an uptick in daily cases — a move that could hold back the country's economic growth and hit its stock markets, said veteran strategist David Roche.
Investor sentiment toward Chinese stocks has been dampened by Beijing's regulatory crackdown on sectors including technology and after-school tutoring.
"Markets have got into the mode of thinking Covid is very ... bad, but economic recovery (is) taking away lockdowns, removing social restrictions — that's kind of the world recipe at the moment," Roche, president and global strategist at Independent Strategy, told CNBC's "Street Signs Asia" on Tuesday.
"Well it's very much not the world recipe in China for good reasons, and therefore markets have to come to terms with the fact that there are economic costs not only within China, but globally as a result of this," he added.
I think China is in the process of exiting its big recovery story from Covid ...David Rochepresident and global strategist, Independent Strategy
The country's National Health Commission reported 143 new Covid cases in mainland China on Monday — the highest number of daily infections since January, according to Reuters. Chinese state media attributed the latest resurgence in infections to the highly transmissible delta variant.
Chinese authorities last week ordered mass testing in Wuhan city — where the coronavirus was first detected — and imposed widespread movement restrictions in major cities including Beijing.
Some economists have raised concerns about China's "zero tolerance" approach to Covid, which refers to the country's aggressive clampdown on any flare-ups in Covid cases. The approach, which includes strict lockdowns and mass testing, helped China keep previous outbreaks under control before the latest resurgence.
But the delta variant is more contagious and could be more difficult to contain — and that could hurt economic recovery in China, economists have warned.
"If lockdowns and vaccination progress do not allow local economies to reopen by mid-August or early September we will need to revisit our 8.8% 2021 GDP forecast," economists from Australian bank ANZ wrote in a Tuesday report.
China effect on the global economy
Any disruptions in the Chinese economy could affect global economic growth, said Roche.
The strategist explained that broader lockdowns across China could interrupt global supply chains – much of which are located in the country.
That could hit international trade, increase the costs of some goods, and raise inflation expectations around the world, he added.
Roche expects China's year-on-year growth in the third quarter to slow to between 2% and 3% from the second quarter's 7.9% expansion.
Over the longer term, China's economic growth will settle at around 5% to 6%, according to Roche.
"I think China is in the process of exiting its big recovery story from Covid, which of course is ahead of the world ... and is now converging with a long-term growth trajectory which is much, much lower than what people became used to in China," he said.
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