China’s plunging markets flash fresh warning signs on economy

July 14, 2022 China Earnings & Filings

Dollar bonds of Chinese developers also slumped, with stress spreading to investment-grade firms on Tuesday.

Chinese financial markets are flashing warning signs that another round of Covid shutdowns could create more turmoil for the economy.

The Hang Seng China Enterprises Index of stocks has lost almost 9% since June 28 as a new Covid subvariant threatens to paralyze factories, dampen consumer spending and hurt construction activity. China’s yuan, meanwhile, is renewing losses against the dollar, with the onshore rate the weakest in a month. Credit stress is also intensifying as China Evergrande Group teeters near its first onshore default, after another developer’s $1 billion delinquency revived broader contagion fears. And iron ore prices have fallen to a seven-month low.

A bullish case on China based on value alone keeps failing, as does the notion that the country’s assets can be a trusty refuge for investors during periods of global market turmoil. The renewed risk-off sentiment shows how Covid Zero and crackdowns on the tech and property sectors has continued to plague investors halfway through 2022.

While official data Friday is set to show China’s economy expanded just 1.2% in the second quarter, some alternative indicators suggest activity actually shrank. At the same time, the central bank is scaling back liquidity injections, which could create tighter financial conditions for the rest of the year.