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China COVID lockdowns: Here's what Wall Street is saying about the economic risk

Increased angst over COVID-19 lockdowns in China and rare protests against the government is weighing down the broader stock market rally.

Global markets stabilized slightly on Tuesday following a 500-plus-point drubbing on the Dow Jones Industrial Average on Monday as protests in China spread. Not helping market sentiment are signs large U.S. companies stand to get swept up into the contentious health-turned-political situation.

On Tuesday, Disney (DIS) Shanghai closed its gates just four days after reopening them. The company said in a statement the closures were to comply with “the requirement of pandemic prevention and control.”

On Monday, Bloomberg reported that Apple (AAPL) could see a six million unit shortfall in iPhones this year amid manufacturing pressures at a key China Foxconn plant.

"With the head scratching zero Covid policy in China now reaching a tipping point and protests across the country, Apple is essentially caught in the cross-fire heading into the all-important Christmas time period," opined Wedbush tech analyst Dan Ives.

Here's what top Wall Street strategists are saying about the contentious situation.

Hui Shan of Goldman Sachs

"Local governments struggle to balance quickly bringing the spread of the virus under control and obeying the '20 measures' which mandate a more targeted approach. The central government may soon need to choose between more lockdowns and more Covid outbreaks. The current situation imposes further downside risk to our below-consensus Q4 GDP forecast. Our 30% subjective probability of reopening before Q2 next year includes some chance of a forced and disorderly exit."

Xiangrong Yu of Citi

"The Covid situation in China may have triggered concerns again. The direction of reopening is very clear, in our view, and we don't think the government will double down on pandemic control measures. Whether China will head into a forced reopening will depend on the Covid situation, but the government still has enough room to maneuver, in our view. We maintain our base case that reopening will gain momentum post the [National People's Congress on March 5] next year, and see higher risk of an accelerated reopening."

BEIJING, CHINA - NOVEMBER 29: Epidemic control workers wear PPE to prevent the spread of COVID-19 as they rest on a park bench in an area where communities are in lockdown on November 29, 2022 in Beijing, China. In recent days, China has been recording its highest number of daily COVID-19 cases since the pandemic began, as authorities are sticking to their strict zero tolerance approach to containing the virus with lockdowns, mandatory testing, mask mandates, and quarantines as it struggles to contain outbreaks.In an effort to try to bring rising cases under control, the government last week closed most stores and restaurants for inside dining, switched  schools to online studies, and told people to work from home among other measures. (Photo by Kevin Frayer/Getty Images)
Epidemic control workers wear PPE to prevent the spread of COVID-19 as they rest on a park bench in an area where communities are in lockdown on November 29, 2022 in Beijing, China. (Photo by Kevin Frayer/Getty Images)

Michael Hirson of 22V Research

"The possibility of a chaotic pivot scenario this winter is rising as the population, as well as local governments, are clearly reaching exhaustion in maintaining zero-Covid policies. If protests continue to grow, or if the population becomes less compliant with Covid restrictions, local officials may conclude that the political risk of maintaining harsh restrictions outweighs the risks of letting outbreaks spread. The leadership may be forced to accept this outcome, at least in some localities, in the face of local exhaustion and Omicron’s high transmissibility. A chaotic pivot is likely to be highly disruptive to the economy – quite possibly worse than zero-Covid, at least in the near term."

Hirson added that a chaotic pivot would be "Chinese authorities essentially abandoning – by choice or by force – the hope of preventing a surge in cases through testing and lockdowns. But this does not mean that China 'lies flat': local governments will need to maintain tight restrictions in areas at risk of seeing the hospital system overwhelmed. Moreover, a chaotic pivot scenario would also damage the economy through increased voluntary restrictions on behavior from households worried about infection. Simply put, while a chaotic pivot could potentially shorten the timeline for China’s eventual reopening, the overall economic and social risks would be high."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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