Stock markets in China and Hong Kong plunge, yuan slides and crude oil falls on China crisis of confidence

The Shanghai Composite and the Hang Seng fall to where they were for the first time in 2007 during the rise of the bubble.

By Wolf Richter for WOLF STREET.

The Shanghai Composite Index plunged 5.1% to 2,928 on Monday, the biggest one-day drop since February 2020, during the Wuhan crisis. The index is now down 20% year-to-date and 14% from a year ago. And for those promoting buy and hold: the index is now back to a level it first reached in February 2007 during the rise of the ridiculous stock market bubble just before the Games. Beijing Olympics.

Gone also is the hype that Chinese equities experienced in mid-March when Vice Premier Liu He, in an effort to stem the then-unfolding slide, made promises of market-friendly measures.

The CSI 300 index, which tracks the biggest blue chip stocks traded in Shanghai and Shenzhen, fell 4.9% on Monday to 3,933, is down 23% year-to-date and 25% compared to a year ago.

Hong Kong’s Hang Seng Index, where many Chinese companies are listed, plunged 3.7% on Monday and is down 31% year-on-year. At 19,869, the index fell to a level first seen in January 2007.

The offshore yuan, after falling 2% last week against the dollar, fell 1.3% on Monday to 6.60 to the dollar, the lowest since November 2020.

When it hit that level, the People’s Bank of China came out in support of the currency and said it would cut the foreign exchange reserve requirement ratio for banks next month to 8% from 9%,” thus increasing the capacity of banks in terms of foreign exchange funds”. use,” the PBOC said, according to Bloomberg. This announcement allowed the currency to recover some of the losses suffered earlier in the day, and it ended down 0.7%.

Last year, the PBOC raised foreign exchange reserve requirements from 5% to 9% to curb the appreciation of the yuan against the dollar.

Crude oil prices have fallen globally, with WTI now down 5.1% to $96.87 a barrel on fears of demand destruction from further market chaos. supply chain due to prolonged lockdowns in Shanghai and potentially Beijing, which would trigger broader and even greater inflation that will hit demand.

One suddenly forgets the factors that fueled the oil price spike, such as Russia’s invasion of Ukraine that made Russian oil toxic in parts of world markets. Markets are kinda funny about these memes suddenly turning around.

What shook markets on Monday was fears of a draconian lockdown in Beijing, similar to the draconian lockdown in Shanghai which is now entering its fifth week and involved measures such as fencing around some residential buildings so that people people can’t get out, mass testing, and forced quarantine in massive quarantine centers.

The spike in cases in Beijing’s Chaoyang district – which includes the central business district and most foreign embassies – has prompted authorities to order three rounds of mandatory Covid tests for the 3.5 million people who live there. They also announced that movement of residents of part of the area, covering around 2.5 square miles, would be restricted during Covid testing. Authorities have identified a school in Chaoyang, a tour group and a delivery service as transmission clusters.

The announcements were seen as signs that Shanghai’s draconian lockdown will be duplicated in Beijing. In response, locals started stockpiling food and empty shelf syndrome began to appear in supermarkets.

Investors were already worried about slowing consumer demand in China amid the resurgence of Covid and the resurgence of lockdowns.

These concerns come on top of a slow-motion collapse in the housing and property development sectors, led by the not-so-slow and now government-controlled collapse of China’s second-largest property developer Evergrande that began in the second half of the year. year and is now in full bloom. Construction has been a major driver of economic growth in China, and the slow-motion collapse of the property development industry is hitting the economy as a whole hard.

There are now growing concerns, as China’s Covid Zero strategy backfires, that President Xi Jinping cannot or will not deviate from the political narrative that presents him as having devised the strategies to fight back. most successful virus fights in the world, and that it will not adapt China’s response to the new reality on the ground, and thus crush the economy. And now there is this crisis of confidence as investors take a second look at the Chinese reality.

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