China’s major stock indexes and its currency opened sharply lower on Monday as widespread protests over the country’s tough Covid-19 restrictions over the weekend rattled investor sentiment.
Hong Kong Hang Seng Index (HSI) fell 4.2% in early trading. It has since pared some losses and last traded 2% lower. The Hang Seng (HSI) China Enterprises Index, a key index that tracks the performance of mainland Chinese companies listed in Hong Kong, lost 2%.
In mainland China, the benchmark Shanghai Composite briefly fell 2.2%, before paring losses to 0.9% lower than Friday’s close. The tech-heavy Shenzhen Components Index fell 1.1%.
The Chinese yuan, also known as the renminbi, plunged against the US dollar on Monday morning. The onshore yuan, which trades in the tightly controlled domestic market, briefly weakened 0.9%. It was last down 0.6% at 7.206 to the dollar. The offshore rate, which trades overseas, fell 0.3% to 7.212 to the dollar.
The fall of the yuan suggests that “investors are frozen on China,” said Stephen Innes, managing partner of SPI Asset Management, adding that the forex market could be “the easiest barometer” to gauge what investors are thinking. nationals and foreigners.
The market plunge comes after protests erupted across China in an unprecedented show of defiance against the country’s strict and increasingly costly zero-Covid policy.
In the country’s biggest cities, from the financial center of Shanghai to the capital Beijing, residents gathered this weekend to mourn the dead of a fire in Xinjiang, denounce zero-Covid and call for freedom and democracy.
Such widespread scenes of anger and defiance, some of which extended into the early hours of Monday morning, are exceptionally rare in China.
Asian markets were also down overall. South Korea’s Kospi lost 1%, Japan’s Nikkei 225 (N225) lost 0.6% and Australia’s S&P/ASX 200 fell 0.3%.
US stock futures – an indication of how markets are likely to open – fell, with Dow futures falling 0.5% or 171 points. S&P 500 futures fell 0.7%, while Nasdaq futures fell 0.8%.
Oil prices also fell sharply as investors feared rising Covid cases and protests in China could sap demand from one of the world’s biggest oil consumers. U.S. crude futures fell 2.7% to trade at $74.19 a barrel. Brent, the global oil benchmark, fell 2.6% to $81.5 a barrel.
On Friday, a day before the protests began, China’s central bank reduced the amount of cash lenders must hold in reserve for the second time this year. The reserve requirement ratio for most banks (RRR) has been reduced by 25 percentage points.
The move was aimed at supporting an economy that had been crippled by strict Covid restrictions and a struggling property market. But analysts don’t think the move will have a significant impact.
“Reducing the RRR now is like pulling a string, as we believe the real hurdle for the economy is the pandemic rather than insufficient loanable funds,” Nomura analysts said in a research report. published on Monday.
“In our view, ending the pandemic [measures] as soon as possible is the key to resuming credit demand and economic growth,” they said.
Innes of SPI Asset Management said China’s economy is currently caught in the middle of a tussle between weakening economic fundamentals and rising hopes of reopening.
“For China’s official institutions, there is no easy path. Accelerating reopening plans when new Covid cases increase is unlikely, given low vaccination coverage among the elderly,” he said. “Mass protests would tip the scales deeply in favor of an even weaker economy and would likely be accompanied by a massive rise in Covid cases, leaving policymakers with a considerable dilemma.”
In the near term, he said, Chinese stocks and currency will likely price in “greater uncertainty” around Beijing’s reaction to the ongoing protests. He expects social unrest could rise in China over the coming months, testing the resolve of policymakers to stick to his draconian zero-Covid mandates.
But in the longer term, the most pragmatic and likely outcome should be “a more rapid easing of [Covid] restrictions once the current surge subsides,” he said.
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