Chinese Stocks Fall as Zero Covid Protests Worsen Situation

Uncertainty has engulfed Chinese markets as protests against Covid-19 measures grow in the country, while a record number of infections complicate the nation’s path to reopening.

Investors sold stocks and yuan as credit markets saw spreads widen, and citizens in major cities took to the streets in a rare show of defiance. Foreign funds ‘unloaded’ the most Chinese stocks onshore in about three weeks, focusing on how the government will respond to the situation, Bloomberg reported.

No end in sight to the problems

The initial panic selling appears to have subsided in the afternoon, with some bets emerging that social unrest could actually accelerate the exit from the Covid Zero regime. However, the developments have created new doubts about market prospects after relaxed Covid guidelines spurred an epic rally and a call to buy China or buy China earlier this month.

– I expect markets to remain volatile in the coming months as China repositions itself in managing the Covid outbreak. The reality on the ground is chaotic as officials struggle to implement 20 new guidelines on zero Covid while simultaneously preventing a rise in cases, said Steven Luk, CEO of FountainCap Research & Investment in Hong Kong.

The Hang Seng Index of Chinese companies closed down 1.7 percent after earlier falling as much as 4.5 percent. The yuan onshore weakened by 0.5 percent against the dollar, after dropping more than one percent at the open, the most since May.

Economists at Goldman Sachs said they see some chances for a ‘disorderly’ exit from the zero Covid regime in China, as the central government will soon have to choose between further lockdowns and new outbreaks of Covid cases.

Reopening stocks

Reopening stocks, including airlines and restaurants, proved relatively resilient in Monday’s sell-off, with Haidilao International Holding Ltd. jumping more than six percent.

These moves indicate a mixed reaction among traders as some overlook social unrest and focus more on the eventual exit from the zero Covid regime.

– Protests create uncertainty, but the destination for reopening has been set since the party congress. I doubt this kind of public pressure could spur a faster pace of reopening that could be positive, but it remains to be seen how authorities will respond to recent events, said Robert Mumford, investment manager at GAM Hong Kong Ltd., to Bloomberg.

Assets strengthened in November as guidelines for a less restrictive approach to the pandemic, along with strong support for the real estate sector, gave investors confidence that the worst is over. An increasing number of Wall Street players have been optimistic about China following Beijing’s political moves to bolster the economy.

On Friday, the People’s Bank of China cut the reserve requirement ratio for the second time this year.

Liquidity not enough to calm markets

The Hong Kong Hang Seng Index fell 1.6 percent, while a separate measure of Chinese tech stocks slid nearly two percent after earlier dropping more than five percent. Onshore, the CSI 300 index fell by 1.1 percent, marking the largest decline in a month.

Foreign investors were net sellers of 3.8 billion yuan ($528 million) of onshore stocks during Monday’s session through trading links with Hong Kong.

The Chinese credit market slid on Monday as spreads on dollar-denominated investment-grade bonds widened by as much as ten basis points, according to credit traders. Dollar bonds of some Chinese property companies, including Country Garden Holdings Co. and Longfor Group Holdings Ltd., ended a three-day rally.

– Assuming that the Covid policy does not change much, and we cannot rule out the risk of it becoming stricter, the government will likely inject more liquidity to lower bond yields. However, this will not be enough to calm the markets, concluded Gary Ng, senior economist at Natixis SA in Hong Kong.