China’s lockdown fears sweep through markets as stocks and yuan plummet

(Bloomberg) – Fears about the economic toll of China’s tough Covid-zero policy intensified on Monday as news that lockdowns were spreading to Beijing sent stocks, commodities and the yuan tumbling.

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The benchmark CSI 300 index closed down nearly 5% to its lowest level since April 2020, erasing gains from a sweeping pledge by officials in March to support the economy. The onshore yuan slumped to its weakest level in 17 months on concerns over rising capital outflows, and oil slipped below $100 on concerns over Chinese demand.

A Covid flare-up that shut down much of Shanghai appeared to worsen over the weekend after China ordered mandatory testing in one district of Beijing and locked down some areas of the capital of more than 20 million people. Officials have warned of more cases in the coming days. The news reverberated across global markets, with stocks and stock futures under pressure and havens like the dollar and Treasuries gaining.

“There are concerns that the Covid situation in Beijing is evolving into what happened in Shanghai, with some ongoing lockdowns biting the economy,” said Kevin Li, portfolio manager at GF Asset Management (Hong Kong) Ltd.

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Traders are wary of the potential impact of coronavirus restrictions on growth in the world’s second-largest economy, which has already shown signs of slowing thanks to a housing crisis and increased regulation. The growth fears come amid expectations of rapid rate hikes by the US Federal Reserve, which could trigger further capital outflows from China and weigh on the yuan.

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The Covid situation is putting the country in “the darkest economic moment in decades,” Junheng Li, founder and CEO of JL Warren Capital, told Bloomberg TV in an interview.

careful and tired

The renewed selling comes as investors are weary that last month’s policy promises to shore up growth and stabilize markets have not been kept. Markets shrugged off the People’s Bank of China’s latest monetary policy pledge on Friday to ensure stability, a move repeated over the past month.

Analysts have started slashing economic growth forecasts for this year below the government’s target of 5.5% amid the extent of lockdowns, after a number of manufacturers and automakers pointed to supply chain disruptions.

In the stock market, a closely watched support level for the Shanghai Composite Index has been broken. The benchmark closed below the psychologically important 3,000 mark after falling 5.1%. An index of Hong Kong-listed Chinese tech stocks slipped 4.9%.

Corporate bonds aren’t spared the pessimism either: Chinese high-yield dollar bonds fell as much as 2 cents against the dollar on Monday, according to credit traders led by developers.

Foreign investors sold 45 billion yuan ($7 billion) worth of shares in March, the largest outflow in nearly two years, while global funds reduced their holdings of Chinese bonds this month at an all-time high.

Impact on commodities

China’s strict adherence to Covid Zero is also sweeping through commodities markets, with the nation heading for the biggest oil demand shock since the pandemic began.

China’s oil demand falls the most since Wuhan lockdown

Meanwhile, iron ore in Singapore plunged nearly 12% before paring about half of the decline.

“The sharp drop in prices is mainly due to the burgeoning impact of Covid,” said Chen Wen Guang, research director at Lange Steel Information Research Center, an industry group in Beijing. As “many areas are affected, people are starting to worry about demand.”

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