China Stocks Slide as Covid Curbs Temper Reopening Hopes

Chloe Lo and John Cheng, Bloomberg News

SHANGHAI, CHINA - NOVEMBER 04: People walk on a pedestrian bridge which displays the numbers for the Shanghai Shenzhen stock indexes on November 04, 2022 in Shanghai, China. (Photo by Hugo Hu/Getty Images) , Photographer: Hugo Hu/Getty Images AsiaPac

(Bloomberg) -- Chinese stocks dropped as the nation increased Covid restrictions in some of its biggest cities, dampening hopes of a reopening that triggered a rally earlier this month.

The Hang Seng China Enterprises Index slid 2.1% Thursday, taking its three-day drop to almost 4%. A gauge of Chinese tech stocks in Hong Kong lost 3.3%, with heavyweights Tencent Holdings Ltd. and Alibaba Group Holding Ltd. sliding ahead of their earnings next week.

The market surge that began last week with wild rumors over China’s potential Covid Zero exit is fading as health officials stick to the stringent policy amid rising virus cases. Volatility has been running high as shares tied to reopening, tech and property have seen outsized upswings in recent days.

Thursday’s selloff is also part of a global risk-off swoon, as cryptocurrencies remain under pressure and caution runs high before a crucial US inflation report. The Nasdaq Golden Dragon Index of Chinese stocks listed in the US plunged almost 7% overnight.

“The market can continue to be choppy as investors respond to signals that emerge on China’s policy and economic direction,” said Vey-Sern Ling, managing director at Union Bancaire Privee. “It is normal to see some consolidation after the strong rebound last week.”

The southern manufacturing powerhouse of Guangzhou is at the center of China’s most significant virus outbreak. That raises the risk of more stringent action from authorities in the factory hub, home to many garment manufacturers as well as automakers like EV company XPeng Inc.

XPeng’s shares plunged more than 9% in a third day of losses on Thursday.

The megacity of Chongqing is also grappling with its worst outbreak in more than a year with cases climbing to 753 on Wednesday from just nine at the start of the month. Schools and non-essential businesses in two districts have been shut.

Reopening is seen as the most important factor for investors to turn more positive on China, said Winnie Wu, China equity strategist at BofA Securities, citing the outcome of a survey last week. “Only a fourth of investors expect to see reopening before the second quarter of 2023.”

READ: China Stock Traders Are Clinging to Every Sign of Hope They See

Most markets in Asia fell Thursday ahead of the US inflation report, which will offer clues on the pace of the Federal Reserve’s tightening. The turmoil in crypto market dented sentiment across other assets, even as Bitcoin regained some ground after tumbling to the lowest levels in two years.

“I believe weak sentiment from the US and crypto is spilling over into Asia today with broad regional declines,” said Marvin Chen, a Bloomberg Intelligence strategist. “We expect volatility to continue until we get a catalyst on policy direction, which may be coming as attention turns to 2023.”

READ: US Inflation to Cool Only Slightly, Keeping Big Fed Hike in Play

--With assistance from Abhishek Vishnoi and Charlotte Yang.

(Updates with market closing prices)