Bloomberg (Bloomberg) — Fears about the economic consequences of China's stringent Covid Zero policy became louder on Monday, as reports of lockdowns spreading to Beijing sent equities, commodities, and the yuan plunging.
The benchmark CSI 300 Index fell over 5% to its lowest level since April 2020, wiping off gains made after policymakers made a broad vow to assist the economy in March. On concerns about growing capital outflows, the onshore yuan fell to its lowest level in 17 months, and oil fell below $100 on concerns about Chinese demand.
A Covid flare-up that shut down much of Shanghai over the weekend appeared to escalate as China ordered mandatory tests in a Beijing neighborhood and shut down some portions of the 20-million-strong metropolis. More instances are expected in the following days, according to officials. Stocks and equities futures were under pressure as a result of the news, while safe havens like the dollar and Treasuries gained.
"There are concerns that the Covid issue in Beijing may deteriorate into what happened in Shanghai with some protracted lockdowns that damage the economy," said Kevin Li, portfolio manager at GF Asset Management (Hong Kong) Ltd.
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Traders are concerned about the impact of coronavirus limitations on growth in the world's second-largest economy, which was already weakening due to a housing crisis and more regulation. The concerns about growth come amid anticipation that the US Federal Reserve would raise interest rates quickly, causing more capital outflows from China and putting pressure on the yuan.
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In an interview with Bloomberg TV, Junheng Li, founder and CEO of JL Warren Capital, warned that the Covid crisis is putting the country in "the darkest era in economic terms for the last couple of decades."
Wary and Worried
The fresh selling comes as investors become increasingly concerned about the government's failure to follow through on policy commitments made last month to boost economy and stabilize markets. Markets shrugged aside the People's Bank of China's newest policy pledge to safeguard stability on Friday, which echoed previous statements.
Given the scope of the lockdowns, analysts have begun reducing economic growth projections for this year below the government's 5.5 percent objective, after a number of manufacturers and automakers flagged supply chain difficulties.
In the stock market, the Shanghai Composite Index's highly watched support line is in jeopardy. After a 5.1 percent drop, the benchmark slipped below the psychologically significant 3,000 threshold. An index of Chinese tech equities listed in Hong Kong was down as high as 5.5 percent.
Corporate debt isn't immune to the doom and gloom: According to credit dealers, Chinese high-yield dollar bonds fell as much as 2 cents on the dollar on Monday, driven by developers.
In March, foreign investors sold 45 billion yuan ($7 billion) of equities, the greatest outflow in nearly two years, while global funds sold the most Chinese bonds ever in that month.
Impact of Commodities
China's tight adherence to Covid Zero is sweeping commodities markets, with the country facing the worst oil demand shock since the pandemic's early days.
Since the Wuhan Lockdown, China's oil demand has plummeted.
Meanwhile, iron ore fell over 12% in Singapore before recovering around half of the loss.
"The fast price drop is primarily due to the growing Covid influence," said Chen Wen Guang, research director at Beijing-based Lange Steel Information Research Center. "With so many places affected, people are starting to be concerned about demand," says one source.