China's plunging markets flash fresh warning signs on economy

HONG KONG • Chinese financial markets are flashing warning signs that another round of Covid-19 shutdowns could create more turmoil for the economy.

The Hang Seng China Enterprises Index of stocks has lost almost 9 per cent since June 28 as a new Covid-19 subvariant threatens to paralyse factories, dampen consumer spending and hurt construction activity.

China's renminbi, meanwhile, is renewing losses against the US dollar, with the onshore rate at the weakest in a month.

Credit stress is also intensifying as China Evergrande Group teeters near its first onshore default, after another developer's US$1 billion (S$1.4 billion) delinquency revived broader contagion fears.

Iron ore prices have also 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.

While official data tomorrow is set to show China's economy expanded just 1.2 per cent 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.

"Investors' primary concerns are the renewed worries about potential disruptions to economic activities," said Saxo Bank head of equity strategy Peter Garnry.

"Mass testing and VAT (value-added tax) rebates have been putting a lot of pressure on local governments' budgets and limiting their capacities to stimulate the economy."

China's government is still betting on a stronger second half of the year for the economy to meet its growth target of around 5.5 per cent.

Beijing has been doling out more fiscal stimulus, including boosting infrastructure spending and cutting taxes for businesses, to shore up the economy.

But reaching the growth target will prove increasingly challenging as China tightens restrictions again to stamp out every Covid-19 outbreak.

This week's market losses came even as credit data suggested stimulus from the People's Bank of China is finally boosting lending - key to offsetting the economic cost of pursuing President Xi Jinping's "zero-Covid-19" strategy.

While aggregate financing reached 5.2 trillion yuan (S$1.09 trillion) last month, far more than the average estimate, it is unclear whether the lending will translate into better domestic demand.

BLOOMBERG