China shares fall sharply on concerns over Covid outbreak and Ukraine war

Stocks in China dropped 5 per cent on Tuesday, taking losses for the year close to 20 per cent in a fresh burst of nerves over surging coronavirus cases.

The CSI 300 index of Shanghai and Shenzhen-listed shares closed 4.6 per cent lower, the declines exacerbated by reports that Beijing had signalled its willingness to supply Russia with military assistance to support its invasion of Ukraine.

Hong Kong’s benchmark Hang Seng index dropped almost 6 per cent to its lowest closing level since 2016, while the city’s China Enterprises index of large and liquid Chinese stocks shed 6.6 per cent.

Companies with heavy exposure to the consumer and travel sectors bore the brunt of the sell-off. A Bloomberg index of Macau casino operators fell more than 11 per cent for the second day in a row and the China Real Estate Owners and Developers index, a gauge of property developers, fell 10 per cent to the lowest close in almost a decade.

Concerns over the potential for more lockdowns spurred offshore investors to dump Chinese shares at the fastest pace in 20 months on Tuesday, according to Financial Times calculations based on Bloomberg data. Stock connect programmes facilitating cross-market trading between Hong Kong and mainland bourses recorded net sales of over Rmb16bn ($2.5bn), bringing total divestment for the week to more than Rmb30bn.

The declines followed sharp falls on Monday, when Chinese stocks in Hong Kong fell the most since 2008 after multiple cities were put into lockdown, including the technology and manufacturing hub of Shenzhen.

China reported more than 3,500 new cases on Monday, up from fewer than 1,400 a day earlier, putting pressure on Beijing’s capacity to maintain its zero-Covid approach.

Eric Lau, an analyst at Citi, said a one-week lockdown of just a few cities would have limited impact on most companies. But he warned that disruptions would escalate “if the partial lockdown measures are prolonged and extended more widely to cover the whole nation”.

Also weighing on sentiment, investors said, was a Financial Times report that the US told allies China was open to providing military assistance to Russia.

“If this is the Americans suggesting there’s a risk China now supports Russia, then it’s a message of ‘Either you’re with us or against us’,” said one Hong Kong-based fund manager at an international asset manager, adding “it’s been a rough ride [for] markets already this week”.

Separately, the People’s Bank of China left rates for medium-term lending unchanged after most analysts had expected the central bank to cut them by 0.1 percentage points in response to mounting economic pressure and disruption caused by the Covid surge.

“With the near-term outlook darkening on multiple fronts, we think it’s only a matter of time before the [PBoC] resumes its rate cuts,” said Julian Evans-Pritchard, senior China economist at consultancy Capital Economics, which expects the central bank to cut rates by 0.2 percentage points in the first half of this year.

Additional reporting by Tabby Kinder in Bangkok