Why investors are fleeing Chinese assets as Xi tightens his grip on power

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China’s top leader, Xi Jinping, on Sunday won a third term as revolutionary leader and introduced a new Politburo standing committee made up of loyalists in a sweep not seen since the era of Communist Party founder Mao Zedong.

Financial markets have been rattled by expectations that Xi’s policy agenda to bolster national security and party political security will shift the world’s second-largest economy to a more state-led model. That could make maintaining political ties and party ideology a higher priority than achieving economic growth and policy reform, economists said.

The sale of Chinese assets partly reflects expectations that Xi will continue the country’s zero-COVID policy, which has led to sweeping lockdowns in an effort to contain the virus, said Fawad Razaqzada, market analyst at City Index and Forex.com. .

“Investors are also concerned that due to the concentration of Xi loyalists at the top of the decision-making body, there is potential for more policy mistakes that could cause serious damage to the future growth trajectory. Xi will have a lot more say in how future policies will shape,” Razaqzada wrote.

Chinese stock markets fell on Monday with Hang Seng HSI from Hong Kong,
-6.36%
ending over 6% lower at a fresh 13-year low. Stocks in mainland China also dipped on Monday, but not as much. The Shanghai Composite SHCOMP,
-2.02%
finished 2% lower, and the CSI 300 000300 benchmark,
-2.93%
down 2.9%.

In the USA, New York-listed shares of China-based companies fell with China’s five largest companies by market capitalization wiping out a total of $55 billion on Monday afternoon, according to data from the Dow Jones Market. Tech giants Alibaba Group Holding Ltd. BABA,
-12.51%,
Tencent Holdings Ltd. TCEHY,
-14.17%
and Meituan MPNGY,
-16.70%
fell 12.5%, 14.2% and 16.7%, respectively.

See: Xi’s power grab punishes Chinese stocks, sending them down as much as 26% in one day

The broader U.S. market eased its worries, with the Dow Jones Industrial Average DJIA,
+1.34%
up more than 400 points, or 1.3%, while the S&P 500 SPX,
+1.19%
advanced by 1.2%.

Meanwhile, the offshore Chinese yuan CNHUSD,
0.02
fell 1.3% to 7.3253 to the dollar on Monday, an all-time low based on data dating back to 2010, according to Dow Jones Market Data.

Live Markets: A historic bad day for the Chinese yuan

The massive sale of China-related assets was particularly shocking given third quarter GDP data more optimistic than expected. China’s economy grew 3.9% in the three months to September 30 from a year earlier, the government said Monday in a statement that was abruptly postponed as Communist Party leaders met last week for the convention.

Third-quarter performance beat market consensus by 3.4% and picked up after growth of 0.4% in the previous quarter, when growth was weighed down by a severe two-month lockdown in Shanghai. However, the data puts average growth for the first nine months of 2022 at 3.0%, well below the annual target of 5.5% set by the government in March.

See: China’s improving economic growth overshadowed by Xi’s takeover

Investors have been battered by China’s economic slowdown, largely due to a tenacious strain of COVID-19 that has spread across the country this year, forcing hundreds of millions of people to confinements. Many had hoped Chinese leaders might spell out a pivot away from tough COVID-19 restrictions after the party congress.

However, Julian Evans-Pritchard, senior China economist at Capital Economics, thinks the outlook remains bleak as the number of cities with outbreaks and lockdowns has reached levels last seen during the peak of the Omicron plus wave. early this year.

“There is no prospect of China lifting its zero-COVID policy in the near future, and we don’t expect any significant easing until 2024,” Evans-Pritchard said in a Monday note. “Recurring virus disruptions will therefore continue to weigh on in-person activity and further large-scale lockdowns cannot be ruled out.”

See: Markets are watching for the start of the Chinese Party Congress this weekend. What investors need to know.

The zero-COVID approach has also compounded the weakness of the country’s indebted real estate sector. Investors feared the housing market meltdown could turn into a mortgage meltdown and hoped that Xi and his new standing committee could provide more political support to trigger a sales rally.

“There are also few signs of an impending turnaround in the real estate sector,” Evans-Pritchard said. “We expect official GDP to grow by only 3.5% next year, with real growth likely to be even weaker.”

In addition, the slowdown in the real estate market could further dampen demand for commodities and weigh on investor confidence.

“Since China is the largest consumer of commodities in the world due to its population and growth, its economic health has a great bearing on the evolution of commodity prices, especially metals and minerals. “, said Boris Ivanov, founder of the Amiral Resources Ltd.

“President Xi’s speech to Congress on Sunday, October 16 signaled that this (zero-COVID) policy will remain unchanged. This will be sad news for investors and producers of metals and minerals like iron ore to crude oil who would prefer less draconian policies undermining demand for commodities.

Base metal prices were higher on Monday as better-than-expected economic data out of China raised hopes of stronger demand. November’s most traded copper contract on the Shanghai Futures Exchange rose 1.3% to 63,910 yuan ($8,809.70) per metric ton, while aluminum gained 0.1% to 18,640 yuan per metric ton. On the New York Mercantile Exchange, copper futures contracts for December HGZ22,
+0.03%
fell 4 cents, or 1.3%, to $3.4305 a pound.

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