Chinese markets stock up as investors worry about Covid-19 lockdowns

Chinese stocks suffered their worst selling in more than two years and the yuan reached its lowest level since late 2020, as investors fear tough anti-Covid-19 policies will add to pressures weighing on China’s economic growth and corporate profits.

The battle with the Omicron variant of Covid-19 adds to a series of challenges facing the economy and markets in China, as well as the domestic regulatory crackdown, the war in Ukraine, and a shift toward tighter monetary policy by many central banks to tackle accelerating inflation. .

Residents of the Chinese capital, Beijing, were stocking up on necessities on Monday In anticipation of a possible closure, as a severe lockdown in Shanghai entered its fifth week. Beijing officials have begun mass Covid-19 tests for people who live or work in the city’s Chaoyang District.

Economists lowered their forecasts for Chinese expansion with the International Monetary Fund last week Reducing growth forecasts for 2022 for the country to 4.4% and Banks lowered their forecasts. Foreign investors have withdrawn billions of dollars from the Chinese stock and bond markets.

On Monday, the Shanghai Composite and CSI 300 were down 5.1% and 4.9%, respectively. These were the largest one-day percentage declines for both benchmarks since February 2020, when concern about the fast-spreading coronavirus in the early days of the epidemic led to sharp declines in Chinese markets after the Lunar New Year holiday.

The offshore yuan fell sharply, surpassing 6.60 against the dollar, according to FactSet. This pullback was built on last week’s selling which ended months of relative stability. Shortly after the currency topped 6.60 against the dollar, China’s central bank said it would adjust its foreign exchange policy, helping the yuan offset some of its earlier losses.

The market recognizes that “the economic recovery will be delayed and the situation in China may be more uncertain, especially in the near term, due to the Omicron situation,” said Jason Liu, head of the Asia principal investment desk at Deutsche Bank International. bank.

“The market is starting to realize that the overall stimulus measures from China could be less than expected or completely late, especially on the monetary side,” said Mr. Liu.

in American trade, On Monday, stocks closed higher After a volatile session. The S&P 500 closed up 0.6%, having earlier fallen about 1.7%. The 10-year Treasury yield fell to 2.825% from 2.905% on Friday, the biggest drop in one-day yield since March 4.

Monday’s defeat in the CSI 300 sent the index of major companies, which includes the largest stocks listed in Shanghai or Shenzhen, to nearly 23%. The broad Shanghai Composite Index has lost nearly 20% over the same period.

Raw material companies were among the biggest losers on Monday with

Tianqi lithium

9.9% decline and rival

Ganfeng lithium

by 9.1%.

The decline was reflected in Hong Kong offshore stocks, where the city’s leading Hang Seng Index fell 3.7%. Haidilao, which operates a hot pot restaurant chain in China, was the main loser, losing 16%.

The Covid-19 restrictions have emerged as the biggest threat to China’s growth, analysts at several local securities firms said in notes to clients. These restrictions could hurt more in the second quarter than in the first, said Xuan Wei, chief strategist at Beijing-based China Asset Management.

With Shanghai still on lockdown amid China’s largest outbreak of Covid-19, residents are turning to social media to vent about food shortages or are bartering with neighbours. Anxiety and hunger prompt many to question Beijing’s anti-epidemic strategy. Photo: Chinatopix via AP

China was already facing weak consumer demand, and the shutdown exacerbated that weakness, which helped explain the share sale, said Patrick Rowe, portfolio manager in the global equities team at Neuberger Berman.

Part of the pressure on Chinese markets comes from foreigners downsizing. Last month, international investors cut off their property of Chinese bonds at a record rate of $15 billion, and The company sold a total net worth of $7.1 billion of Chinese stocks through a trading link with Hong Kong known as Stock Connect.

As Treasury yields rise, the additional yield that Chinese government bonds provide over their US counterparts has diminished, reducing the relative attractiveness of Chinese debt.

The narrowing of the gap, combined with rising risks to China’s growth, has prompted speculative investors to liquidate their yuan holdings, and led to a buildup of tactical bets against the currency, said Lemon Zhang, Barclays FX and Emerging Markets Analyst. .

COVID-19 testing site in Chaoyang District, Beijing.


picture:

Zhou Huanzong/Zuma Press

However, she said the People’s Bank of China likely won’t allow a significant currency devaluation in the near term, citing its recent record of setting a midpoint for intra-renminbi trading that was stronger than market prices indicated.

Late Monday Beijing time, the People’s Bank of China (PBOC) said it would require financial firms to hold smaller amounts of foreign currency as reserves. The offshore yuan regained some strength to trade at around 6.586 per dollar, a level that still puts it on track for its weakest settlement since November 2020.

The central bank said it will cut the foreign exchange reserve ratio next month by one percentage point to 8% to improve liquidity in that market. It raised that percentage twice last year, to 9% from 5%, in moves analysts said were aimed at easing then-strong revaluation pressures.

Cross-border bond investment data for April is not yet available. Wind’s stock data showed that foreigners dumped the equivalent of $676 million in Chinese stocks on Monday through Stock Connect. After modest inflows earlier in April, month-to-date outflows totaled $494 million.

Monday’s declines mean Chinese domestic stocks have now wiped out all of their gains since recovering from their mid-March lows. This recovery was prompted by Vice Premier Liu He, who stepped into it Stop slippage in stock prices By undertaking a series of market-friendly measures.

Since then, officials have made new efforts to reassure investors. Last week, Fang Xinghai, vice-chairman of the China Securities Regulatory Commission, said he believed any foreign withdrawal from Chinese assets would only be a short-term move, while the commission asked domestic institutions to act as long-term investors and “overcome – the volatility of market on the run.

A spokeswoman for the State Administration of Foreign Exchange, the foreign exchange regulator, also assured investors last week that China’s economy is resilient and yuan-denominated assets have long-term investment value.

write to Rebecca Feng at rebecca.feng@wsj.com and Dave Sebastian at dave.sebastian@wsj.com

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