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Tuesday, February 20, 2024

China Markets Slide as Covid Protests Put Investors on Edge

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(Bloomberg) — Chinese assets slumped Monday as a sense of chaos and uncertainty gripped traders after growing protests against Covid curbs complicated the nation’s path to reopening.

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The Hang Seng China Enterprises Index declined more than 4% early Monday before paring losses by about half. The onshore yuan weakened 0.4% against the dollar, having plunged more than 1% at the open, the most since May.

Protests spread over the weekend as citizens in major cities including Beijing and Shanghai took to the streets to express their anger on the nation’s Covid controls. The rare show of defiance is raising the threat of a government crackdown, prompting investors to re-think their bets after jumping back in on reopening hopes.

Read: China Covid Unrest Boils Over as Citizens Defy Lockdown Efforts (4)

“We might see some derisking around Chinese markets,” said Chris Weston, head of research at Pepperstone Group Ltd. “We are seeing some outflows of the offshore yuan, which I think is a pretty good indication of how Chinese markets may fare.”

Goldman Sachs Group Inc. economists said they see some chance of a “disorderly” exit from Covid Zero in China, as the central government may soon need to choose between more lockdowns and more Covid outbreaks.

Reopening Stocks

Property and tech shares were among the worst performers in the Monday selloff, while reopening stocks including airlines and restaurants proved relatively resilient.

The moves underscore a mixed response among traders as some brush aside the social unrest and focus more on the eventual Covid Zero exit.

“The protests create uncertainty but the destination of opening up has been set since the party congress,” said Robert Mumford, an investment manager at GAM Hong Kong Ltd. “One suspects this sort of public pressure might encourage a faster pace of opening which would be a positive but it remains to be seen how the authorities react to recent events.”

Assets have rallied in November as directives for a less-restrictive pandemic approach, coupled with strong support for the property sector, gave investors confidence that the worst is well behind.

A growing number of Wall Street players had turned upbeat on China following Beijing’s policy steps to shore up the economy. On Friday, the People’s Bank of China lowered the reserve requirement ratio for the second time this year.

Read: Asian Markets Brace for Impact as China Unrest Hits Sentiment

The rally has fizzled in the last few days as authorities grapple with a record number of Covid cases.

The Hong Kong’s Hang Seng Index fell 2.2% as of 10:47 a.m. local time while a separate gauge of Chinese tech stocks fell by a similar extent, having fallen more than 5% earlier. On the mainland, the CSI 300 Index declined 1.7%.

Foreign investors were net sellers of 6.3 billion yuan ($874 million) of onshore shares so far in Monday’s session via trading links with Hong Kong.

China’s credit markets slid at the open on Monday, as the spreads on investment-grade dollar notes over Treasuries widened as much as 10 basis points, according to credit traders. Dollar bonds of some Chinese property firms including Country Garden Holdings Co. and Longfor Group Holdings Ltd. snap a three-day rally.

“Assuming the Covid policy would not change much, and we cannot rule out the risk that it gets tougher, the government will likely inject more liquidity to cool down the bond yields,” said Gary Ng, senior economist at Natixis SA in Hong Kong. “However, this will not be enough to calm the market.”

–With assistance from Tania Chen, Georgina Mckay, Lorretta Chen and Wei Zhou.

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©2022 Bloomberg L.P.

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