China stocks, yuan slump after Beijing doubled down on 'zero-Covid' policy

Under the controversial 'zero-Covid' policy, China has locked down major cities including Shanghai, hitting production, disrupting supply chains and fanning recession fears. (Photo by Reuters)

Under the controversial 'zero-Covid' policy, China has locked down major cities including Shanghai, hitting production, disrupting supply chains and fanning recession fears. (Photo by Reuters)

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SHANGHAI (May 6): Chinese and Hong Kong stocks tumbled on Friday (May 6), while the yuan slumped to a one-and-a-half-year low, as Beijing's pledge to double down on its zero-Covid policy hit investor confidence and stoked worries of a further economic downturn.

Sentiment was also hurt by a global equity sell-off amid spiking inflation as well as rising geopolitical tensions.

Both China's blue-chip index CSI 300 and the Shanghai Composite Index lost more than 2%, while Hong Kong's benchmark Hang Seng Index dropped 3.8%.

China's yuan weakened sharply against a strengthening dollar, touching the lowest level since November 2020. 

China will fight any comments and actions that distort, doubt or deny the country's Covid-19 response policy, state television reported on Thursday, after a meeting of the Standing Committee of the Communist Party's politburo, China's highest decision-making body.

"The economy was barely mentioned in the meeting, suggesting Beijing may have become more determined to maintain the zero-Covid strategy," said Nomura in a note.

Under the controversial "zero-Covid" policy, China has locked down major cities including Shanghai, hitting production, disrupting supply chains and fanning recession fears.

"People are worried about the zero-Covid policy and lockdown of major cities," said Steven Leung, the executive director of institutional sales at brokerage UOB Kay Hian in Hong Kong.

The anxiety offsets any optimism from repeated official vows to roll out measures to aid companies struggling in a virus-hit economy. 

"Government officials have been working very hard to speak more positively regarding what they're going to do to push the economy, but investors are still waiting for the impact and for real numbers to come out," UOB Kay Hian's Leung said.

Equity sell-off

Confidence was also dented by a global sell-off of equities as the US Federal Reserve stepped up monetary tightening to tame inflation.

"For China, the never-ending lockdowns can haunt its growth prospects and leave room for even more accommodative monetary policies," Natixis said in a report.

The divergence in Sino-US monetary policies will contribute to the yuan's decline, and "investors may move from selecting with China towards exploring choices within the world", Natixis wrote.

Stocks fell across the board.

Leading the losses, the CSI Tourism Index tumbled 6.4% to a 10-month low on fears strict Covid-19 curbs will continue to hit travel demand. Real estate stocks slumped 5.8% on deepening worries about the sector's financial health.

The Hang Seng Tech Index lost more than 5% even after Chinese policymakers vowed last week to support the technology sector and the platform economy.

Index heavyweight Alibaba Group, Tencent and Meituan all dropped sharply.

Hangzhou Hikvision Digital Technology Co tumbled 9% on Friday to a near two-year low, extending Thursday's 10% slump, amid rising geopolitical tensions.

The Financial Times reported that the US is moving towards imposing new sanctions on the Chinese video surveillance company.