Covid lockdowns hit Chinese stock markets and yuan

The Chinese currency was trading at 6.57 to the US dollar in offshore trade, after plunging Monday to its lowest level against the greenback since November 2020. The Shanghai Composite index closed down 1.4% . It is now down around 22% since its recent peak in September 2021.

The yuan – also known as the renminbi – has lost more than 3% against the US dollar in the past week alone, as rising Covid-19 cases in Beijing raise fears that the Chinese capital could joins Shanghai and other major cities in lockdown.

China’s strict adherence to its zero Covid policy, coupled with a crackdown on Big Tech and private companies, a real estate crisis and risks from Russia’s war in Ukraine, have triggered an unprecedented capital flight from foreign investors in recent months.

The fall of the yuan over the last two months stands in stark contrast to its performance during last year’s pandemic, when it was one of the strongest currencies in the world.
the a rapid decline comes as China remains determined to maintain its strict Covid restrictions despite the high economic price. Shanghai’s financial and manufacturing hub has been in lockdown for about a month, forcing businesses to close and worsening global supply chain disruption.
China’s stock markets are also among the worst performers in the world this year.

The Shenzhen Composite – a very tech-heavy index – has fallen 31% year-to-date, second only to Russia’s Moex, which has fallen 42%, according to Refinitiv The data. The benchmark Shanghai Composite is also among the biggest global losers, down 21% year-to-date.

The People’s Bank of China tried to calm nerves on Monday with another promise to revive the economy. In an unprecedented move, he reduced the amount of foreign currency banks must hold as reserves to 8% from 9%. The move would effectively increase the supply of dollars in the market, and analysts widely believe the move is aimed at stemming the yuan’s rapid fall.

The offshore yuan rate was little changed on Tuesday, while its value in the onshore market rose just 0.1%. (Onshore, the yuan is only allowed to trade within a narrow band of 2% from a daily midpoint rate set by the central bank. It can trade more freely overseas.)

“The [renminbi] has been too expensive given China’s economic weakness,” Societe Generale analysts wrote on Tuesday.

They added that the economy is “close to breaking point” due to widespread lockdowns that have disrupted production, hampered consumption and strained supply chains.

Foreign investors are abandoning China.  Russia's war is the latest trigger

“It appears that the threats to China’s growth outlook … outweigh everything when it comes to financial markets,” Jeffrey Halley, senior market strategist for Oanda, said in a note.

In its latest China Strategy Report, Goldman Sachs estimated that Chinese tech stocks have lost $2 trillion in market capitalization globally since their peak 14 months ago. This is equivalent to 11% of China’s GDP in 2021.

Wall Street banking analysts cited a mix of contributing factors: unprecedented regulatory repression, rising US rates, uncertainty about the future of US-listed Chinese stocks, growth risks in due to the resurgence of Covid and real estate issues, and more recently, concerns about the spillover of geopolitical risks from Russia to China.

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