Foreign investors, shocked by the outcome of the Communist Party’s leadership reshuffle, dumped Chinese stocks and the yuan despite stronger-than-expected GDP data. They fear that Xi’s increasing seizure of power will lead to the continuation of Beijing’s existing policies and further weigh on the economy.
Hong Kong’s benchmark Hang Seng
(HSI) The index fell 6.4% on Monday, marking its biggest daily decline since November 2008. The index closed at its lowest level since April 2009.
The Chinese yuan weakened sharply, hitting a fresh 14-year low against the US dollar in the onshore market. In the offshore market, where it can trade more freely, the currency tumbled 0.8%, hovering near its weakest on record, although China’s economy turned around in the third quarter from a year earlier, according to the National Bureau of Statistics 3.9% has grown. Economists polled by Reuters had expected growth of 3.4%.
The sharp sell-off came a day after the ruling Communist Party unveiled its new leadership for the next five years. Not only did Xi secure an unprecedented third term as party leader, but he also packed his new leadership team staunch loyalists.
A number of senior officials who have supported market reforms and opening up the economy were absent from the new top team, raising concerns about the future direction of the country and its relationship with the United States. Those pushed aside included Premier Li Keqiang, Vice Premier Liu He and Central Bank Governor Yi Gang.
“It appears that the leadership reshuffle has scared foreign investors into dumping their Chinese investments, leading to severe sell-offs in Hong Kong-listed Chinese stocks,” said Ken Cheung, chief Asian foreign exchange strategist at Mizuho Bank.
The GDP data marked an increase from the 0.4% increase seen in the second quarter as China’s economy was hit by widespread Covid lockdowns. Shanghai, the country’s financial center and a major global trade hub, was shut down for two months in April and May. But the growth rate was still below the annual official target set by the government earlier this year.
“The outlook remains bleak,” said Julian Evans-Pritchard, senior China economist for capital economics, in a research report on Monday.
“There is no prospect of China lifting its zero-Covid policy anytime soon, and we do not expect any significant easing before 2024,” he added.
Coupled with a further weakening of the global economy and an ongoing slump in Chinese real estate, any headwinds will continue to weigh on the Chinese economy, he said.
Evans-Pritchard expects China’s official GDP to grow just 2.5% this year and 3.5% in 2023.
Monday’s GDP data was originally scheduled to be released on Oct. 18 during the Chinese Communist Party Congress, but was postponed without explanation.
The possibility that policies like zero-Covid, which has led to sweeping lockdowns to contain the virus, and common prosperity — Xi’s attempt to redistribute wealth — could be escalated is a concern, Cheung said.
“With the Politburo Standing Committee composed of close allies of President Xi, market participants are reading the implications of President Xi’s power consolidation and policy continuation,” he added.
Mitul Kotecha, head of emerging markets strategy at TD Securities, also pointed out that the disappearance of pro-reform officials from the new leadership does not bode well for the future of China’s private sector.
“The departure of perceived pro-stimulus officials and reformers from the Politburo Standing Committee and their replacement by Xi allies suggests that ‘shared prosperity’ will be the officials’ primary push,” Kotecha said.
Under the banner of the “Common Prosperity” campaign, Beijing launched a sweeping crackdown on the country’s private companies that shook almost every industry to the core.
“That [market] The reaction is consistent with the reduced prospects for any significant stimulus or changes to the zero-Covid policy, in our view. Overall, the prospects for renewed growth acceleration are limited,” said Kotecha.
In China’s tightly controlled domestic market, the benchmark Shanghai Composite Index fell 2%. The tech-heavy Shenzhen Component Index lost 2.1%.
The Hang Seng Tech Index, which tracks the 30 largest tech companies listed in Hong Kong, fell 9.7%.
The sell-off also spilled over into the United States. Shares in Alibaba and several other top Chinese stocks traded in New York, such as electric vehicle company Nio
(NOK) and XpengAlibaba rival JD.com
(JD) and Pinduo
(PDD) and search engine Baidu
(BE)were all down sharp monday.
Correction: A previous version of this article gave the wrong day for Chinese stock trading in New York to be in decline.