China lockdown fears rip through markets as stocks, commodities, Yuan tank

Fears about the economic toll of China’s strict Covid Zero policy intensified Monday, as news that lockdowns were spreading to Beijing sent stocks, commodities and the yuan tumbling.

The benchmark CSI 300 Index dropped as much as 2.7% to the lowest since June 2020, wiping out gains from a March pledge by officials to support the economy. The onshore yuan fell to its weakest in a year on concerns about rising capital outflows and oil sank below $100 on worries over Chinese demand.

A Covid flareup that shut down much of Shanghai appeared to worsen over the weekend after China ordered mandatory tests in a district of Beijing and locked down some areas of the capital. The news echoed around global markets with stocks and equity futures under pressure and havens like the dollar and Treasuries gaining.

“There are concerns about the Covid situation in Beijing evolving into what happened in Shanghai with some prolonged lockdowns that bites the economy,” said Kevin Li, portfolio manager at GF Asset Management (Hong Kong) Ltd.

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Traders are balking at the potential impact of coronavirus restrictions on growth in the world’s second-largest economy, which was already showing signs of slowing down thanks to a property crisis and increased regulation. The growth fears come amid China’s widening policy divergence with the U.S., which has led to foreign outflows and weighed on the yuan.

Global investor nerves were already frayed after traders bolstered bets on a more aggressive pace of rate increases from the Fed and European Central Bank late last week.

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The Covid situation is putting the country into “the darkest moment in economic terms for the last couple of decades,” said Junheng Li, JL Warren Capital founder and CEO, told Bloomberg TV in an interview.

Wary and Weary

The renewed selling comes as investors grow weary about a lack of follow-through on policy promises last month to shore up growth and stabilize markets. Markets shrugged off Friday’s latest policy vow from the People’s Bank of China to ensure stability, which repeated commentary seen in the past month.

Analysts have started downgrading economic growth forecasts for this year below the government’s 5.5% target given the extent of the lockdowns, after a number of manufacturers and car makers highlighted supply chain disruptions.

In the stock market, a closely-watched support line for the Shanghai Composite Index is under threat. The benchmark is hovering near 3,000 points, a level it has held above for over a decade.

Commodity Impact

China’s strict adherence to Covid Zero is also sweeping through commodities markets, with the nation heading for the largest oil demand shock since the early days of the pandemic.

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Meanwhile, iron ore tumbled almost 12% in Singapore before paring around half of the drop.

“The sharp price fall is mainly due to the burgeoning Covid impact,” said Chen Wen Guang, research director at Lange Steel Information Research Center, an industry group in Beijing. With “lots of areas affected, people are beginning to worry about demand.”