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

China’s top leader, Xi Jinping, secured a groundbreaking third leadership term on Sunday and introduced a new Politburo Standing Committee stacked with loyalists in a clean sweep not seen since the era of Communist Party founder Mao Zedong.

Financial markets were rattled on expectations that Xi’s policy agenda of bolstering national security and the party’s political security would shift the world’s second-largest economy towards a more state-led model. That could make maintaining political ties and the party’s ideology a higher priority than achieving economic growth and political reform, economists said.

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

“Investors are also worried that because of Xi’s loyalists being concentrated at the top of the decision-making body, there is the potential for more policy mistakes that could cause severe damage to the future path of growth. Xi will have a lot more say in how future policies will shape,” Razaqzada wrote.

Chinese stock markets tumbled on Monday with Hong Kong’s Hang Seng HSI,
ending more than 6% lower to a new 13-year low. Shares in mainland China also plunged on Monday, although not by as much. The Shanghai Composite SHCOMP,
finished 2% lower, and the benchmark CSI 300 000300,
declined 2.9%.

Chinese stocks in Hong Kong erased some of the losses on Tuesday with Hang Seng edging 0.1% lower after struggling for direction earlier in the session. Shanghai Composite was about flat.

In the US, the New York-listed shares of China-based companies plummeted with the top five largest Chinese companies by market capitalization wiping a total of $55 billion as of Monday afternoon, according to Dow Jones Market data. Tech giants Alibaba Group Holding Ltd. Baba,
Tencent Holdings Ltd. TCEHY,
and Meituan MPNGY,
tumbled 12.5%, 14.2% and 16.7%, respectively.

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

The broader US market shook off concerns, with the Dow Jones Industrial Average DJIA,
rising over 400 points, or 1.3%, while the S&P 500 SPX,
advanced 1.2% on Monday. US stocks opened mostly higher Tuesday with the Nasdaq Composite COMP,
in the lead as investors awaited earnings from some of the biggest tech companies in the US

Meanwhile, the offshore Chinese yuan CNHUSD,
fell 1.3% to 7.3297 per dollar on Monday, an all-time low on record based on data back to 2010, according to Dow Jones Market Data.

Live Markets: A historically bad day for China’s yuan

The heavy selling in China-related assets was particularly jarring given the rosier-than-expected third quarter GDP data. China’s economy expanded by 3.9% in the three months ended Sept. 30 from a year earlier, the government said Monday in a release that it was abruptly postponed as Communist Party leaders gathered last week for the congress.

The third-quarter performance exceeded the market consensus of 3.4% and picked up from a 0.4% growth in the previous quarter, when growth was weighed down by a harsh two-month lockdown in Shanghai. However, the data brings the average growth for the first nine months of 2022 at 3.0%, well below the full-year target of 5.5% set by the government in March.

See: China’s Improved Economic Growth Is Overshadowed by Xi’s Power Grab

Investors have been battered by China’s economic slowdown, due in large part to a stubborn strain of COVID-19 that has rippled through the country this year which forced hundreds of millions of people into lockdowns. Many had hoped Chinese leaders could spell out a pivot away from strict COVID-19 restrictions after the party congress.

However, Julian Evans-Pritchard, senior China economist of Capital Economics, thinks the outlook remains gloomy as the number of cities with outbreaks and lockdowns has risen to levels last seen during the peak of the Omicron wave earlier this year.

“There is no prospect of China lifting its zero-COVID policy in the near future, and we don’t expect any meaningful relaxation before 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 on watch as China’s Party congress kicks off this weekend. What investors need to know.

The “zero-COVID” approach also worsened the weakness in the country’s debt-laden property sector. Investors feared the housing-market meltdown could turn into a mortgage collapse and hoped Xi and his new standing committee could deliver more policy support to ignite a sales turnaround.

“There are also few signs of an imminent turnaround in the property sector,” said Evans-Pritchard. “We think official GDP will expand just 3.5% next year, with actual growth likely to be even weaker.”

In addition, the downturn in the real-estate market could further suppress commodity demand and sour investors’ sentiment.

“Given that China is the biggest commodity consumer in the world by virtue of its population and growth, its economic health has a great bearing on the course of commodity prices – particularly metals and minerals,” said Boris Ivanov, founder of Emiral Resources Ltd.

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

Prices of base metals were mostly lower on Tuesday. The most-traded December copper contract on the Shanghai Futures Exchange rose 0.5% to 63,040 yuan ($8,628.53) per metric ton, while aluminum fell 0.5% to 18,496 yuan per metric ton. On New York Mercantile Exchange, copper futures for December HGZ22,
were down 0.9% to $3,400 per pound.


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