China stocks slide as Covid flareups hurt optimism

China stocks slide as Covid flareups hurt optimism

(Bloomberg) – Chinese stocks and the yuan declined as a spate of reported Covid deaths and tighter restrictions in some counties rudely reminded investors the road to a reopening will be rough.

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The Hang Seng China Enterprises Index fell as much as 3.7%, falling for the fourth session and paring the month’s gain to 20%. Stock reopenings, including casinos and restaurant chains, plummeted. The onshore yuan weakened 0.6% against the dollar after gaining 1.4% last week.

The setback reflects a chaotic reality as China seeks to move away from its strict Covid-Zero restrictions. Despite general guidelines that include relaxed quarantine and mass testing rules, worsening outbreaks across the country are reviving fears that authorities may have to resort to tight restrictions to minimize the death toll.

Read: China’s reopening stocks fall after Covid death in Beijing

“It feels like one step forward and two back,” said Willer Chen, analyst at Forsyth Barr Asia Ltd.

Shijiazhuang — a city of around 11 million that was previously rumored to be a test case for reopening — has banned residents in areas considered high-risk from leaving their homes. Additionally, Beijing reported three Covid deaths over the weekend, ending months without an official death related to the virus.

The developments are blunting the euphoria that boosted the nation’s assets earlier this month, as optimism over China’s gradual reopening and a housing sector bailout drove investors back into the market.

Morgan Stanley, Bank of America Corp. and Franklin Templeton Investments are among a growing list of strategists and money managers turning bullish on the market on newfound optimism about China’s economy following heavy losses into October.

Read: Wall Street’s ‘Buy China Calls’ chorus grows louder

Stay optimistic

“In the early stages of reopening, it’s still quite chaotic as the policy has been reversed in terms of on-site implementation,” said Tommy Xie, head of Greater China research at Oversea-Chinese Banking Corp. “In my view, however, the trend towards reopening is unchanged.”

Global funds have net bought about 41 billion yuan ($5.8 billion) of onshore Chinese stocks through trading links with Hong Kong so far this month (as of Friday). This is after net outflows of 57.3 billion yuan in October, the largest since March 2020.

On Monday, the Hang Seng Index fell as much as 3.4%, while the onshore benchmark CSI 300 fell more than 1%. Bilibili Inc. was one of the biggest losers on the Hang Seng China Enterprises Index, falling as much as 9.3% after it was announced that it would be delisted.

Meanwhile, China 10-year government bond yields fell two basis points to 2.81% on Monday. China pulled short-term cash from the financial system for the first time in almost two weeks as the sell-off in government and corporate bonds eased.

“Although the pace of reopening could be slowed in some areas with more severe outbreaks, I think this will not change the broader trajectory of reopening,” said Zhang Yong, fund manager at Beijing Siyuan Heng Yue Asset Management Co. The Covid situation could impact the strength and ceiling of the recovery but overall I’m fairly bullish and think the bottom is over.”

–With support from Wenjin Lv and April Ma.

(Updates with new comments.)

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