Chinese stocks extended this week’s rout as traders fretted over the economic fallout from the nation’s Covid-Zero strategy, with lower-than-expected policy stimulus adding to their disappointment.
The CSI 300 Index slumped 1.8% on Thursday — capping a fifth day of losses — as President Xi Jinping defended China’s lockdown-dependent approach to fighting the pandemic in a speech at the opening ceremony of the Boao Forum for Asia.
The benchmark has now erased almost all of its mid-March rally triggered by a sweeping set of policy promises from a committee led by Vice Premier Liu He to stabilize markets. It is a whisker away from its closing level on March 15, when a historic rout pushed it to the lowest since June 2020.
Lockdowns in major cities across the country, coupled with capital outflow risks as the Federal Reserve hikes rates, have dampened sentiment toward local Chinese shares. Investors who had expected authorities to ramp up stimulus have since been underwhelmed, with Wednesday’s decision by banks to keep lending rates unchanged serving as another setback.
“The market is flooded with pessimism,” said Wu Wei, fund manager at Beijing Win Integrity Investment Management Co. “While there have been some policies since Liu He, the greater weight on people’s minds now is the virus. No one can accurately guess the bottom. Judging from the virus situation, we could still see a further slide.”
The onshore yuan weakened for a third day against the dollar to trade at its lowest level since October. Chinese high-yield dollar bonds were down about 1 cent on the dollar, according to credit traders.
Here are three charts that highlight investor caution over China’s onshore equities market:
The amount of outstanding margin financing dropped for a 10th consecutive session on Wednesday, the longest streak of declines since February 2021. Falling demand for leveraged trade indicates sluggish risk appetite. History suggests stock leverage demand tends to rise alongside a market rebound.
“Matters have taken a turn for the worse with the latest round of the Covid-19 resurgence that has led to lockdowns of key economic hubs,” BofA Securities Inc. strategists led by Ritesh Samadhiya wrote in a note this week. “A significant ramp up in policy easing is paramount in attaining the ‘about 5.5%’ growth target.”
Overseas investors are pulling money from mainland shares as lockdowns amplify growth risks and the yuan’s weakness against the dollar falls to multi-month lows. Foreigners offloaded 45 billion yuan ($7 billion) of shares onshore through the stock connect in March, the most in two years. Net outflows amounted to 6 billion yuan so far this month through Wednesday, according to data compiled by Bloomberg.
Daily turnover on Shanghai and Shenzhen exchanges dipped below 800 billion yuan earlier this week, marking the lowest level since May last year. The slump underscores investor caution as China sticks to its strict Covid Zero approach. Decreasing trading turnover in a down-trending market could indicate a short-term bottom, at least according to past occurrences, though investors say a meaningful rebound is unlikely barring a shift in Covid policy.