Chaos grips markets in China as Covid protests cloud reopening path

A sense of chaos and uncertainty swept through Chinese markets on Monday as growing protests against Covid curbs and a record number of infections complicated the nation’s path to reopening.

Investors sold stocks and the yuan, while credit markets saw spreads widen as 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.

The initial panic selling appeared to subside in the afternoon and some bets emerged that the social unrest could actually speed up an exit from the Covid Zero regime. Still, the turn of events has cast fresh doubt on the market’s outlook after relaxed Covid guidelines led to an epic rally and a chorus of “buy China” calls earlier this month.

“I expect markets to remain choppy in the coming months as China repositions itself in dealing with the Covid outbreak,” said Steven Luk, managing director at FountainCap Research & Investment in Hong Kong. “Reality on the ground is chaotic as officials struggle to implement the 20 new Zero Covid guidelines while the number of cases does not increase.”

The Hang Seng China Enterprises Index closed down 1.7 percent after falling as much as 4.5 percent earlier. The onshore yuan weakened 0.5 percent against the dollar, after plunging more than 1 percent at the open, the most since May.

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 have to choose between more lockdowns and more Covid outbreaks.

Reopening of shares

Opening stocks including airlines and restaurants proved relatively resilient in Monday’s selloff, with Haidilao International Holding Ltd. which jumped more than 6 percent.

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

“The protests are creating uncertainty, but the goal of opening up has been set since the party congress,” said Robert Mumford, a chief investment officer 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 respond 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 far behind.

A growing number of Wall Street players had turned positive on China following Beijing’s policy steps to prop 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 turmoil hits sentiment

Hong Kong’s Hang Seng index fell 1.6 percent, while a separate gauge of Chinese technology shares fell nearly 2 percent, after falling more than 5 percent earlier. On the mainland, the CSI 300 index closed down 1.1 percent, the biggest decline in a month.

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

China’s credit markets fell on Monday, as spreads on investment-grade dollar bills over government bonds widened as much as 10 basis points, according to credit traders. Dollar bonds from some Chinese real estate firms, including Country Garden Holdings Co. and Longfor Group Holdings Ltd., took a three-day rally.

“Assuming that Covid policy won’t change much and we can’t rule out the risk of it getting tougher, the government is likely to add more liquidity to cool bond yields,” said Gary Ng, senior economist at Natixis SA in Hong Kong. “But this will not be enough to calm the market.”

By John Cheng and Charlotte Yang, with assistance from Tania Chen, Georgina Mckay, Lorretta Chen and Wei Zhou.

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