- Goldman sees a possibility of an early and disorderly exit from Covid Zero
- Stocks and Yuan fall amid concerns about social unrest and crackdown
Chinese assets plunged on Monday as a sense of chaos and uncertainty gripped traders after growing protests against Covid restrictions complicated the nation’s path to reopening.
The Hang Seng China Enterprises Index fell more than 2% in afternoon trading, with technology and real estate stocks leading the decline. The onshore Yuan weakened 0.6% against the dollar, having fallen 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 over the nation’s Covid controls. The rare show of defiance is raising the threat of a government crackdown, prompting investors to reconsider their bets after jumping back to reopening hopes.
“We could see some risk reduction in Chinese markets,” said Chris Weston, head of research at Pepperstone Group Ltd. “We’re seeing some outflows from the offshore Yuan, which I think is a good indication of how Chinese markets can do.”
Economists at Goldman Sachs Group Inc. said they see some possibility of a “disorderly” exit from Covid Zero in China, as the central government will soon have to choose between more lockdowns and more Covid outbreaks.
Reopening of Stocks
The reopening of stocks, including airlines and restaurants, proved relatively resilient in Monday’s sell-off, with Haidilao International Holding Ltd. posting gains.
The moves underscore a mixed response among traders, as some put aside social unrest and focus more on the eventual exit from Covid Zero. Some market watchers are betting that the growing protests may even accelerate an easing of restrictions.
“The protests create uncertainty, but the fate of the opening has been set since the party congress,” said Robert Mumford, investment manager at GAM Hong Kong Ltd. “One suspects that this kind of public pressure could encourage a faster pace of opening, which would be positive, but it remains to be seen how the authorities react to recent events.”
Assets rallied in November as directives for a less restrictive pandemic approach, coupled with strong support for the real estate sector, gave investors confidence that the worst is behind us.
A growing number of Wall Street players had become optimistic about China following Beijing’s policy steps to prop up the economy. On Friday, the People’s Bank of China cut the reserve requirement ratio for the second time this year.
The demonstration has faded in recent days as authorities grapple with a record number of Covid cases.
Hong Kong’s Hang Seng Index fell 2.3% as of 1:30 p.m. local time, while a separate gauge of Chinese tech stocks fell 3%, having fallen more than 5% earlier. On the continent, the CSI 300 index declined by 1.8%.
Foreign investors were net sellers of 6 billion Yuan ($833 million) of onshore shares so far in Monday’s session through trade ties to Hong Kong.
China’s credit markets fell at Monday’s open, as spreads on investment-grade dollar notes on Treasuries widened as much as 10 basis points, according to credit traders. Dollar bonds of some Chinese real estate firms, including Country Garden Holdings Co. and Longfor Group Holdings Ltd., break a three-day rally.
“Assuming Covid policy doesn’t change much, and we can’t rule out the risk of it getting tougher, the government will likely inject more liquidity to cool bond yields,” said Gary Ng, senior economist at Natixis SA in Hong Kong. “However, this will not be enough to calm the market.”
Source: Bloomberg
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