Xi’s power grab spurs historic market rout as foreigners flee

Published Mon, Oct 24, 2022 · 08:45 PM

A SENSE of exasperation swept across Chinese markets as President Xi Jinping moved to stack his leadership ranks with loyalists, with stocks capping their worst day in Hong Kong since the 2008 global financial crisis and the yuan weakening to a 14-year low. 

The Hang Seng China Enterprises Index, a gauge of Chinese stocks listed in Hong Kong, plunged 7.3 per cent in its worst showing after any Communist Party congress since the inception of the index in 1994. Foreign investors fled mainland markets, selling a record amount of equities via trading links in Hong Kong and fuelling a nearly 3 per cent loss in the CSI 300 Index. The onshore yuan fell as much as 0.6 per cent to the weakest since January 2008.  

The market meltdown following the reshuffle, which highlighted Xi’s unquestioned grip over the ruling party, shows deep disappointment over a likely continuation of policies staked on Covid Zero and state-driven companies. Tech giants Alibaba Group Holding, Tencent Holdings and Meituan all tumbled more than 10 per cent as investors remained skeptical that Xi and his allies will seek a rejuvenation of private enterprise. 

“The market is concerned that with so many Xi supporters elected, Xi’s unfettered ability to enact policies that are not market friendly is now cemented,” said Justin Tang, head of Asian research at United First Partners. 

While the appointment of Xi’s allies to key posts may help accelerate major agendas, the addition of Covid Zero advocates to the Politburo Standing Committee diminishes the chance of any early loosening of pandemic restrictions. 

Foreigners sold a net 17.9 billion yuan (S$3.6 billion) of mainland shares via trading links with Hong Kong on Monday (Oct 24), a record since data going back to 2016. 

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The swoon in Chinese stocks stands in contrast to global shares, which had their best weekly performance since July last week. The Hang Seng China index is trading at the lowest relative to the S&P 500 since 2001, showed data compiled by Bloomberg.  

A slew of China’s key economic data – released Monday after abrupt delays last week – showed a mixed recovery. The economy grew faster than expected in the third quarter with industrial activity improving despite Covid restrictions and a property slump, but retail sales weakened. 

Economists remain wary about future growth given the rolling Covid lockdowns. Authorities suspended in-person schooling and dining-in at restaurants in a district at the centre of Guangzhou, stoking concerns about potential disruption in the southern manufacturing hub. 

“The Hong Kong market is seeing a panic-selling moment,” said Dickie Wong, executive director of research at Kingston Securities. “While China reported macro data that beat expectations, the market is on a way down, as the leadership reshuffle and tensions between China and the US continue to drag down sentiment and adds uncertainty.” 

In the currency market, the onshore yuan is nearing its weak end of the 2 per cent trading limit around the fixing again, signalling a rise in bearish sentiment towards the currency. The People’s Bank of China set the fixing at 7.1230 per dollar on Monday, weaker than the recent pattern of near 7.11 per US dollar.  

China’s high-yield dollar bonds, dominated by notes sold by real estate firms, dropped about 1-3 cents on the dollar on Monday, according to credit traders.

The onshore credit market, however, is a rare bright spot. Some key onshore corporate-bond yields have been at their closest levels to comparable Chinese government debt in about 15 years, boosted by a slew of easing measures to support a slowing economy.

“The market situation currently might be the worst I’ve ever seen in my career. Sentiment is even worse than during the 2008 global financial crisis,” said Harris Wan, vice-president at iFAST Global Markets. BLOOMBERG

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