Chinese Stocks Slump, Yuan Weakens On Shanghai Lockdown News

Much to the chagrin of both the locals (who have been stockpiling necessities for fear of another lockdown) and sell-side economists (who have been cranking out client notes warning about the potential economic blowback), local authorities in Shanghai announced a staggered lockdown of China’s largest city (which has a population of more than 25 million people, 3x the population of NYC) after it reported a record number of daily cases.

The news rattled local markets on Monday, as Chinese stocks tumbled, bond yields dropped and the yuan weakened against the dollar.

The reaction wasn’t exactly a surprise, as rising case numbers both on the mainland and in Taiwan have sown fears about fresh supply chain havoc (although authorities in Shanghai did stipulate that the local port would remain open).

Here’s a rundown of various market moves (source: Bloomberg):

• Asian stocks fell for a third consecutive day, as a Covid-related lockdown in Shanghai and increasing infections in Taiwan renewed investor concern about the fallout of the virus on global supply chains and manufacturing.
• 10-year government bond yields fall 1bp to 2.79%.
• The onshore and offshore yuan fell to the lowest in two weeks. USD/CNY climbed as much as 0.3% to 6.3825, while USD/CNH climbed as much as 0.2% to 6.3983.
• The MSCI Asia Pacific Index lost as much as 1%, with Taiwan Semiconductor Manufacturing Co. and Sony Group the biggest contributors to the retreat.
• Taiwan’s Taiex was among the biggest decliners among major regional gauges, while China’s CSI 300 index fell to the lowest in two weeks.
• Asian stocks are headed for their third-straight monthly loss, the worst stretch since early 2020.
• Macau casinos and some Chinese consumer-related companies declined as the lockdown in Shanghai was seen hurting a recovery in China’s consumption.

One economist from Goldman Sachs (which recently projected that China will lose one percentage point of annualized GDP growth for every month that its lockdowns persist) warned that the Shanghai lockdown would only exacerbate the situation in an already slowing economy.

“The shutdown, as you say, of such a big region is going to have a negative impact. Already the economy was slowing,” Peter Oppenheimer, chief equity strategist at Goldman Sachs, said in an interview with Bloomberg TV.

Another economist suggested that the panic could spread to global markets.

“Global markets seem to be a bit nervous about the effectiveness of China’s zero-tolerance policy toward Covid, and the potential for more demand and supply-chain disruptions as we might be only dealing with the tip of the iceberg,” Stephen Innes, managing partner at SPI Asset Management, wrote in a note.

There were a few stand-out gainers: Meituan jumped after strong earnings and Tencent gained on a share buyback plan, cushioning the regional benchmark and propelling an almost 3% rebound in the Hang Seng Tech Index

According to Sunday’s announcement, authorities said they would divide Shanghai into two districts for the purposes of the mass testing, using the Huangpu River that passes through the city as a guide. Districts to the east of the river, and some to its west, will be locked down and tested between March 28 and April 1, while the rest of the city will be locked down and tested between April 1 and 5.

US equity futures turned lower Monday morning as the market contagion appeared to spread to the US, amid fears that more supply chain disruptions could exacerbate inflationary pressures, increasing the market’s conviction in Citi’s call for 4 consecutive 50 basis point rate hikes this year.