Hong Kong’s Hang Seng
(HSI) Index fell as much as 4.2% in early trading. It has since pared some losses and last traded 2% lower. The Hang Seng
(HSI) China Enterprises Index, a key index that tracks the performance of mainland Chinese companies listed in Hong Kong, lost 2%.
In mainland China, the benchmark Shanghai Composite briefly fell 2.2%, before trimming losses to 0.9% lower than Friday’s close. The tech-heavy Shenzhen Component Index dropped 1.1%.
The Chinese yuan, also known as the renminbi, plunged against the US dollar on Monday morning. The onshore yuan, which trades in the tightly controlled domestic market, briefly weakened 0.9%. It was last down 0.6% at 7.206 per dollar. The offshore rate, which trades overseas, dropped 0.3% to 7.212 per dollar.
The plunging yuan suggests that “investors are running ice cold on China,” said Stephen Innes, managing partner of SPI Asset Management, adding that the currency market might be “the simplest barometer” to gauge what domestic and overseas investors think.
The markets tumble comes after protests erupted across China in an unprecedented show of defiance against the country’s stringent and increasingly costly zero-Covid policy.
In the country’s biggest cities, from the financial hub of Shanghai to the capital Beijing, residents gathered over the weekend to mourn the dead from a fire in Xinjiang, speak out against zero-Covid and call for freedom and democracy.
Such widespread scenes of anger and defiance, some of which stretched into the early hours of Monday morning, are exceptionally rare in China.
Asian markets were also broadly lower. South Korea’s Kospi lost 1%, Japan’s Nikkei 225
(N225) shed 0.6%, and Australia’s S&P/ASX 200 fell by 0.3%.
US stock futures — an indication of how markets are likely to open — fell, with Dow futures down 0.5%, or 171 points. Futures for the S&P 500 were down 0.7%, while futures for the Nasdaq dropped 0.8%.
Oil prices also dropped sharply, with investors concerned that surging Covid cases and protests in China may sap demand from one of the world’s largest oil consumers. US crude futures fell 2.7% to trade at $74.19 a barrel. Brent crude, the global oil benchmark, lost 2.6% to $81.5 per barrel.
On Friday, a day before the protests started, China’s central bank cut the amount of cash that lenders must hold in reserve for the second time this year. The reserve requirement ratio for most banks (RRR) was reduced by 25 percentage points.
The move was aimed at propping up an economy that had been crippled by strict Covid restrictions and an ailing property market. But analysts don’t think the move will have a significant impact.
“Cutting the RRR now is just like pushing on a string, as we believe the real hurdle for the economy is the pandemic rather than insufficient loanable funds,” said analysts from Nomura in a research report released Monday.
“In our view, ending the pandemic [measures] as soon as possible is the key to the recovery in credit demand and economic growth,” they said.
Innes from SPI Asset Management said China’s economy is currently caught in the midst of a tug-of-war between weakening economic fundamentals and increasing reopening hopes.
“For China’s official institutions, there are no easy paths. Accelerating reopening plans when new Covid cases are rising is unlikely, given the low vaccination coverage of the elderly,” he said. “Mass protests would deeply tilt the scales in favor of an even weaker economy and likely be accompanied by a massive surge in Covid cases, leaving policymakers with a considerable dilemma.”
In the near term, he said, Chinese equities and currency will likely price in “more significant uncertainty” around Beijing’s reaction to the ongoing protests. He expects social discontent could increase in China over the coming months, testing policymakers’ resolve to stick to its draconian zero-Covid mandates.
But in the longer term, the more pragmatic and likely outcome should be “a quicker loosening of [Covid] restrictions once the current wave subsides,” he said.