Hong Kong stocks had their worst day since the 2008 global financial crisis, just a day after Chinese leader Xi Jinping secured his iron grip on power at a major political rally.
Foreign investors frightened by the outcome of the Communist Party leadership reshuffle Chinese stocks and the yuan were dumped despite the release of stronger than expected GDP data. They fear Xi’s tightening grip on power could lead to prosecution Beijing’s existing policies and further harm the economy.
Hong Kong’s benchmark Hang Seng Index (HSI) plunged 6.4% on Monday, marking its biggest daily decline since November 2008. The index closed at its lowest level. since April 2009.
The Hang Seng Tech Index, which tracks the 30 largest tech companies listed in Hong Kong, plunged 9.7%.
Shares of Alibaba (BABA) and Tencent (TCEHY) – the crown jewels of China’s tech sector – both fell more than 11%, erasing a total of $54 billion on their market value.
The Chinese yuan weakened sharply, hitting a new 14-year low against the US dollar in the onshore market. In the offshore market, where it can trade more freely, the currency fell 0.8%, approaching its lowest level on record.
The a strong sell-off came a day after the ruling Communist Party unveiled its new leadership for the next five years. Along with securing an unprecedented third term as party leader, Xi has filled his new leadership team with loyal loyalists.
A number of senior officials who have supported market reforms and the opening of the economy were absent from the new top team, raising concerns about the future direction of the country and its relationship with the United States. Those dismissed included Premier Li Keqiang, Vice Premier Liu He and central bank governor Yi Gang.
“It appears the management reshuffle has caused foreign investors to offload their Chinese investments, prompting strong sales of Hong Kong-listed Chinese stocks,” said Ken Cheung, chief Asian forex strategist at the bank. Mizuho.
“With the Politburo Standing Committee made up of close allies of President Xi, market participants are reading the implications as President Xi’s consolidation of power and continued policy,” he added.
The possibility that policies such as zero-Covid, which has resulted in broad lockdowns to contain the virus, and “common prosperity” – Xi’s attempt to redistribute wealth – could be scaled up was concerning, Cheung said.
Mitul Kotecha, head of emerging markets strategy at TD Securities, also pointed out that the disappearance of pro-reform officials from the new leadership bodes ill for the future of China’s private sector.
“The departure of officials and reformers seen as supportive of reviving the Politburo Standing Committee and their replacement by Xi allies suggests that ‘common prosperity’ will be the main push for officials,” Kotecha said.
Under the banner of the “Common Prosperity” campaign, Beijing has launched a massive crackdown on the country’s private enterprise, which has shaken almost every industry.
“The [market] The reaction to our advice is consistent with the diminished prospects for meaningful stimulus or shifts towards zero-Covid policy. Overall, the prospects for a reacceleration of growth are limited,” Kotecha said.
In the tightly controlled domestic market in China, the benchmark Shanghai Composite Index fell 2%. The tech-heavy Shenzhen Components Index lost 2.1%.
The market crash came despite the release of better-than-expected economic data.
China’s economy grew 3.9% in the third quarter from a year ago, according to the National Bureau of Statistics. Economists polled by Reuters had forecast growth of 3.4%.
GDP data marked a recovery from the 0.4% increase in the second quarter, when China’s economy was battered by widespread Covid lockdowns. Shanghai, the country’s financial center and a global trade hub, was shut down for two months in April and May.
But the growth rate was still below the official annual target the government set earlier this year.
“The outlook remains bleak,” Julian Evans-Pritchard, senior China economist for Capital Economics, said in a research report on Monday.
“There is no prospect of China lifting its zero-Covid policy in the near future, and we don’t expect any significant easing until 2024,” he added.
Coupled with a further weakening of the global economy and a continuing slump in China’s real estate, all headwinds will continue to pressure the Chinese economy, he said.
Evans-Pritchard expected China’s official GDP to grow just 2.5% this year and 3.5% in 2023.
Monday’s GDP data was originally due to be released on Oct. 18 at the Chinese Communist Party Congress, but was postponed without explanation.
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