Growing China unrest over strict Covid curbs spooks investors in Asia

Investors are readying for a dip as markets open in Asia to news of growing unrest in China over Covid restrictions

Investors are readying for a dip as markets open in Asia on Monday to news of growing unrest in China over Covid restrictions.
 

Protests spread across the country Sunday as citizens took to the streets and university campuses, venting their anger and frustrations on local officials and the Communist Party. There was heavy police presence in some areas where huge crowds gathered in Shanghai, and demonstrations were also reported in the capital Beijing.

The yuan fell, the Australian dollar led commodity currencies lower and the greenback strengthened against most major peers as the unrest cast a shadow over risk sentiment. Stock markets in South Korea, Japan and Australia opened lower.  

Here’s what analysts had to say about the market implications for Asia: 

Risk Pricing
 

“We might see some derisking around Chinese markets,” said Chris Weston, head of research at Pepperstone Group Ltd. “We are seeing some outflows of the offshore yuan, which I think is a pretty good indication of how Chinese markets may fare,” he said, adding that the outlook for China over the longer term remains relatively robust.

Sell-Off
 

“Anything exposed to China is probably going to be vulnerable here -- we still have not yet seen the government respond,” said Jessica Amir, a market strategist at Saxo Capital Markets in Sydney. “Either way, forward earnings of Chinese exposed companies will be in question and investors will probably express that by selling.”

“Expect this raises concerns and drives a sell-off across the region, albeit we have seen this before so not going to be too material,” said Karen Jorritsma, head of Australian equities at RBC Capital Markets. “I think the bigger issue is longer term what does this mean for supply chain and the corporates.”

Disappointed Investors
 

“Markets will respond negatively to the widespread protests and rising case numbers, which are likely to trigger new supply-chain disruptions and dampen consumption demand, at least in the short term,” said Gabriel Wildau, managing director at Teneo Holdings LLC in New York. “Investors probably also share some of the disappointment of the protesters themselves. Both groups expected — perhaps wrongly — that the ‘20 measures’ signaled a more decisive policy shift away from zero-Covid and are now dismayed to see local officials returning to hard lockdowns.”

Weaker Currency
 

“The deteriorating Covid situation in China should weaken AUD and CNH,” Commonwealth Bank of Australia Ltd. strategists including Joseph Capurso wrote in a note. The ongoing lockdowns “will inevitably be a negative impact on economic activity from the restrictions on movement,” he said. 

Catalyst for Change
 

“The Chinese onshore equity market might interpret the public protest as another catalyst for change and thus view it favorably,” said Jason Hsu, chief investment officer at Rayliant Global Advisors. “Anything that hold out hope for an improved policy becomes good news” when the market has already priced in draconian Covid policy, he added.