China stocks slide as Covid flare-ups dent optimism

CHINESE stocks and the yuan retreated as a string of reported Covid deaths and tighter restrictions in some districts gave investors a rude reminder that the path to any reopening will be rough.  

The Hang Seng China Enterprises Index dropped 2 per cent in its fourth straight session of declines, paring this month’s rally to about 22 per cent. Reopening stocks including casinos and restaurant chains tumbled. The onshore yuan weakened 0.7 per cent against the US dollar after gaining 1.4 per cent last week.  

The setback reflects a messy reality as China seeks to pivot away from its stringent Covid-Zero restrictions. Despite broad guidelines stipulating loosened quarantine and mass testing rules, worsening outbreaks across the nation are rekindling fears that authorities may have to resort to harsh restrictions to minimise the death toll.  

“It feels like one step forward, two steps back,” said Willer Chen, analyst at Forsyth Barr Asia. “It is super hard to reopen in the short term given winter is coming, and cases are at a super high level and spreading across the whole country.”  

Shijiazhuang – a city of some 11 million and formerly rumoured to be a test case for reopening – has forbidden residents in areas deemed high-risk from leaving their homes. What is more, Beijing reported three Covid deaths over the weekend, ending months of zero official virus-related fatalities.  

The developments are sapping the euphoria that had boosted the nation’s assets earlier this month, when optimism over China’s gradual reopening and a rescue package for the property sector drove investors back into the market.     

Morgan Stanley, Bank of America and Franklin Templeton Investments are among a growing list of strategists and money managers turning bullish on the market, on the back of new-found optimism over China’s economy following heavy losses up to October. 

“It is still quite messy in the early stage of reopening due to the flip-flop of the policy in terms of implementation on the ground,” said Tommy Xie, head of Greater China research at OCBC. “However, the end of reopening is unchanged in my view.”

A Monday (Nov 21) commentary in People’s Daily said China must firmly rectify excess curbs and prevent indiscriminate lockdowns, while authorities issued new guidelines in a follow-up to the latest instructions on optimising Covid restrictions. 

SEE ALSO

China Covid cases steady as many Beijing businesses, schools shut

Global funds have bought around a net 39.6 billion yuan (S$7.6 billion) of onshore Chinese shares so far this month via trading links with Hong Kong. That is after net outflows of 57.3 billion yuan in October, the biggest since March 2020.  

The Hang Seng Index fell 1.9 per cent on Monday, while the onshore benchmark CSI 300 slipped 0.9 per cent. A Bloomberg Intelligence gauge of Chinese real estate shares trimmed losses following a statement that financial regulators have asked banks to stabilise lending to property developers and construction firms. 

Meanwhile, China’s 10-year government bond yields dropped one basis point to 2.82 per cent on Monday. China withdrew short-term cash from the financial system for the first time in nearly two weeks, as a sell-off in government and corporate bonds eased.  

“Though the pace of the reopening in some areas with more severe outbreaks might be slowed down, I think it won’t change the broader course of reopening,” said Zhang Yong, a fund manager at Beijing Siyuan Heng Yue Asset Management. “The Covid situation might impact the strength and ceiling of the rebound, but overall I’m quite optimistic, and I think the bottom has passed.” BLOOMBERG