The Shanghai Composite and Hang Seng fall to where they’d first been in 2007 during the run-up 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 down 14% from a year ago. And for folks promoting buy-and-hold: The index has now returned to a level it had first reached in February 2007 during the run-up of the ridiculous stock market bubble just before the Beijing Olympics.
Also gone is the hype-and-hoopla bump that Chinese stocks got in mid-March when Vice Premier Liu He, in order to stem the slide then in progress, came out with promises of market-friendly measures.
The CSI 300 index, which tracks the biggest blue-chip stocks trading in Shanghai and Shenzhen, dropped 4.9% on Monday, to 3,933, is down 23% year-to-date, and is down 25% from 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-over-year. At 19,869, the index has regressed to a level first seen in January 2007.
The offshore yuan, after dropping 2% last week against the dollar, fell as much as 1.3% on Monday to 6.60 per dollar, the lowest since November 2020.
When it hit that level, the People’s Bank of China came out to support the currency and said it would cut the foreign-exchange reserve requirement ratio for banks next month to 8%, from 9%, thereby “increasing banks’ capabilities of forex fund use,” the PBOC said, according to Bloomberg. This announcement caused the currency to recover some from the losses earlier today, and it ended down 0.7%.
Last year, the PBOC had raised the foreign-exchange reserve requirement, from 5% to 9%, to tamp down on the appreciation of the yuan against the dollar.
Crude oil prices fell globally, with WTI now down 5.1%, at $96.87 a barrel, on fears of demand destruction resulting from further supply chain chaos due to prolonged lockdowns in Shanghai and potentially in Beijing, that would trigger broader and even bigger inflation that will hit demand.
Suddenly forgotten are the factors that had powered the spike in oil prices to begin with, such as Russia’s invasion of Ukraine that has made Russian oil toxic on parts of the global markets. Markets are kind of funny about these memes that suddenly do U-Turns.
What rattled markets on Monday was the fear of a draconian lockdown in Beijing, similar to the draconian lockdown in Shanghai that is now entering its fifth week and entailed measures such as fences around some residential buildings so people couldn’t get out, mass testing, and forced quarantine in massive quarantine centers.
Surging cases in Beijing’s Chaoyang district – which includes the central business district and most foreign embassies – caused authorities to order three rounds of mandatory Covid testing of the 3.5 million people living there. They also announced that the movements of residents in a portion of the area, covering about 2.5 square miles, would be limited during the Covid tests. Authorities identified a school in Chaoyang, a tour group, and a deliver service as transmission clusters.
These announcements were seen as signs that the draconian lockdown in Shanghai will be duplicated in Beijing. In response, residents began stockpiling food, and the empty-shelves syndrome started cropping up in supermarkets.
Investors were already worried about slowing consumer demand in China amid the resurgence of Covid and the resurgence of the lockdowns.
These worries pile on top of the slow-motion collapse of the housing and property development sectors, led by the not-so-slow-motion and now government-controlled collapse of China’s second largest property developer Evergrande that commenced in the second half last year and is now in full bloom. Construction has been one of the primary drivers of economic growth in China, and the slow-motion collapse of the property-development sector is hitting the overall economy hard.
There are now growing worries, as China’s Covid Zero strategy is backfiring, that President Xi Jinping cannot or will not deviate from the political narrative that features him as having come up with the world’s most successful virus-fighting strategies, and that he will not adapt China’s response to the new reality on the ground, and will thereby crush the economy. And so now there’s this confidence crisis as investors take a second look at China’s reality.
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