Chinese stocks slumped deeper into a bear market Tuesday and the yuan traded near a 17-month low as investors grow increasingly pessimistic about the impact of Covid-19 lockdowns on the world’s second biggest economy.
The Chinese currency traded at 6.57 to the US dollar in offshore trade, after plunging to its lowest level against the greenback since November 2020 on Monday. The Shanghai Composite index closed down 1.4%. It has now lost about 22% since its recent peak in September 2021.
The yuan — also known as the renminbi — has lost more than 3% against the US dollar in the past week alone as rising Covid-19 cases in Beijing spark fears that the Chinese capital could join Shanghai and other major cities in lockdown.
China’s strict adherence to its zero Covid policies, coupled with a crackdown on Big Tech and private enterprise, a real estate slump and risks related to Russia’s war in Ukraine, have triggered an unprecedented flight of capital by foreign investors in recent months.
The yuan’s fall over the last two months is in sharp contrast with its performance during the pandemic last year, when it was one of the strongest currencies in the world.
The rapid decline comes as China remains determined to maintain its strict Covid restrictions despite the hefty economic price. The financial and manufacturing hub of Shanghai has been in lockdown for about a month, forcing businesses to shut down and worsening global supply chain disruption.
Chinese stock markets are also among the worst performing in the world this year.
The Shenzhen Composite — a tech-heavy index — has fallen 31% since the start of the year, just behind Russia’s Moex, which has dropped 42%, according to Refinitiv data. The benchmark Shanghai Composite is also among the biggest global losers, falling 21% year-to-date.
The People’s Bank of China tried to calm nerves Monday with another promise to boost the economy. In an unprecedented move, it cut the amount of foreign exchange banks must hold as reserves to 8% from 9%. This move would effectively increase the supply of dollars in the market, and analysts widely believe the decision is intended to stem the yuan’s rapid drop.
The yuan’s offshore rate was little changed Tuesday, while its value on the onshore market was up by just 0.1%. (Onshore, the yuan is allowed to trade only within a narrow band of 2% from a daily midpoint rate set by the central bank. It can trade more freely offshore.)
“The [renminbi] has been too expensive given China’s economic weakness,” Société Générale analysts wrote on Tuesday.
They added that the economy is “near breaking point” because of the widespread lockdowns that have disrupted production, hindered consumption, and placed strains on supply chains.
“It seems that threats to China’s growth outlook … trumps all as far as financial markets are concerned,” said Jeffrey Halley, senior market strategist for Oanda, in a note.
In its latest China Strategy report, Goldman Sachs estimated that China’s tech stocks have lost $2 trillion in market cap worldwide since their peak levels 14 months ago. That’s equivalent to 11% of China’s GDP in 2021.
The Wall Street bank analysts cited a mix of contributory factors: the unprecedented regulatory crackdown, rising US rates, uncertainty about the future of Chinese stocks listed in the United States, growth risks because of Covid’s resurgence and property woes, and more recently, concerns about the spillover of geopolitical risks from Russia to China.