China’s stocks plunged on Tuesday as surging coronavirus cases threatened the outlook for the world’s second-largest economy and the central bank dashed expectations for a cut in a key lending rate.
The Ukraine crisis also continued to weigh on sentiment, reviving worries about widening differences between Beijing and Washington as the United States raised concerns about China’s alignment with Russia.
The Chinese yuan weakened against the dollar for a fourth straight session to hit a three-month low, amid signs of capital outflows on economic slowdown worries and rising geopolitical risks Beijing is facing.
China stocks slumped to 21-month lows, while mainland firms listed in Hong Kong sank to lows not seen since 2008.
The blue-chip CSI300 index fell 4.6% to 3,983.81, the lowest since June 15, 2020, while the Shanghai Composite Index lost 5% to 3,063.97.
Tech giants listed in Hong Kong plunged 8.1%. The Hang Seng Tech index has lost about 22% since last Friday, as the US Securities Exchange Commission identified Chinese companies that will be delisted if they do not provide access to audit documents.
The People’s Bank of China (PBOC) said it would keep the rate on its one-year medium-term lending facility loans unchanged at 2.85% from the previous operation, defying expectations for a cut.
Adding to the gloom in markets were mainland China’s steep jump in daily Covid-19 infections, with new symptomatic cases on Tuesday more than doubling from a day earlier to a two-year high.
China’s southern technology hub of Shenzhen suspended public transport including buses and subways, prompting manufacturers such as Apple suppliers Foxconn and Unimicron Technology Corp to halt operations. The financial hub of Shanghai locked down some housing and office compounds.
“China’s economy could be severely hit again,” said Nomura analysts in a note. “With the much-worsening pandemic and Beijing’s resolution in maintaining its zero-Covid strategy, we believe China’s ‘around 5.5%’ GDP growth target this year is becoming increasingly unrealistic.”
The market selling came despite data showing China’s economy perked up in the first two months of the year, with key indicators all exceeding analysts’ expectations.
The data “shows the government’s supportive policies have started to help the economy,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management. “But the macro outlook in the next few months remains challenging. I am surprised the PBOC did not cut the MLF interest rate today.”
In Hong Kong, the Hang Seng index fell 5.7% to 18,415.08, the lowest since February 12, 2016. The China Enterprises Index also lost 6.6% to 6,123.94, the lowest since October 29, 2008.
It was the Hang Seng benchmark’s worst day since July 2015 and the decade’s busiest trading day.
Falls were exacerbated by heavy selling by foreign investors through China’s Stock Connect programme. Refinitiv data showed outflows for the seventh straight session, totalling 13.3 billion yuan ($2.08 billion) on the day.
“The mood [in Hong Kong] is dire,” Jim Walker, chief economist at Aletheia Capital, told the Reuters Global Markets Forum on Tuesday. .“The exodus of expats is growing every day. Any excuse to sell is the name of the game.”
Meanwhile, JPMorgan Chase & Co downgraded 28 Chinese stocks listed in the United States and Hong Kong on Monday, sending the Nasdaq Golden Dragon China Index down 11% overnight. The Golden Dragon China Index has fallen more than 40% over the past month.
“We find China Internet unattractive on a 6-12 month view with an unpredictable share price outlook, depending on the market perception of China’s geopolitical risks, macro recovery and internet regulation risk,” JPMorgan Chase & Co said in a note.
“As the Russia-Ukraine conflict continues, we believe global investors are increasingly nervous about geopolitical risks to China as more and more country and corporates impose sanctions on Russia,” JPMorgan Chase & Co said.
• Reuters with additional editing by Jim Pollard
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