China and Hong Kong are feeling the Covid, Property and Russian strain

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by Shaun Richards

At a time like this we need to be on alert for signs of stress in financial markets and at the moment the clearest sign of that is found if we look towards the Orient. Here is the view of the South China Morning Post.

Hong Kong’s key stock index plunged to a six-year low, tracing declines in the Shanghai and Shenzhen markets as a deteriorating Covid-19 outbreak in mainland China combined with the Ukraine war and other negative news to weigh on sentiments.

The Hang Seng Index ended the day at 19,531.66, a decline of almost 5 per cent and the biggest one-day plunge in 22 months. The Hang Seng Tech Index tumbled by 11 per cent, its steepest daily loss since its creation in July 2020.

So we have seen a sharp fall in the Hang Seng taking it below 20,000 as we remind ourselves that as recently as last June it was above 29,000. The leader of the dive has been the Tech Index which has taken quite a hammering.

Both Hang Seng Tech Index and the Nasdaq Golden Dragon Index have lost more than 60% from their peaks, respectively. Alibaba Group Holdings Ltd. sank more than 5% while Tencent Holdings Ltd., which is headquartered in Shenzhen, was down 4%.   ( bloomberg)

Things were weak on Friday too with this being one of the factors in play.

The tumble follows a Friday report that Didi Global Inc. has suspended preparations for its planned Hong Kong listing after failing to appease regulatory demands, reigniting fears over Beijing’s crackdown. ( bloomberg )

Along the way we are yet again left wondering if the Vampire Squid has been taking its customers for Muppets.

Goldman Sachs Group Inc. strategists toned down their optimism on China stocks, slashing their valuation estimates.

Covid Problems

This issue has returned in Hong Kong.

HONG KONG, March 14 (Reuters) – Hong Kong leader Carrie Lam said on Monday there were no plans to tighten strict social distancing measures as the Chinese-ruled territory battles to contain a coronavirus surge that has submerged its health system amid soaring deaths.

We learnt some time ago what to do with official denials especially when we note numbers like the ones below.

Hong Kong has reported more than 700,000 COVID-19 infections and about 4,200 deaths, most of them in the past three weeks. The former British colony has followed mainland China’s “dynamic zero” policy which seeks to curb all outbreaks as soon as they occur, instead of trying to live with the virus.

The pace looks to be accelerating.

Health authorities reported 26,908 new infections on Monday with 249 deaths.

I am at a loss as to why they have not vaccinated those most at risk.

But deaths have spiked, particularly amongst its mostly unvaccinated elderly, with the city registering the most deaths per million people globally in the week to March 10, according to data publication Our World in Data.

The next link in this particular chain is the fact that it looks to have spread to China.

China’s government has locked down Shenzhen, a city of 17.5 million people, as it tries to contain its worst ever Covid-19 outbreak across multiple provinces, with case numbers tripling from Saturday to Sunday.

A government notice on Sunday said all residential communities were now under “closed management”, meaning they would be locked down. Every resident would undergo three rounds of testing, for which they were allowed to leave their homes, and all buses and subways were suspended. ( The Guardian )

That has particular significance for the supply-chain crisis.

On Monday afternoon Foxconn, which produces iPhones for Apple, announced it was among businesses suspending operations in Shenzhen.

These leads to concerns about what will happen at the port?

Shenzhen’s Yantian International Container Terminal (YICT), one of China’s busiest ports, said in a WeChat statement it was operating normally, though two companies with warehouses at the port said they needed to temporarily suspend operations. ( Reuters )

Any closures there would of course add to any supply-chain issues. Also it is not the only place affected as Reuters point out.

Toyota (7203.T) said on Monday its joint venture with China’s FAW Group had suspended production in Changchun, while its Tianjin city operations remained unaffected.

Volkswagen (VOWG_p.DE), which also has a joint venture with FAW, said it had suspended production at its vehicle and component plants from Monday to Wednesday…….

A factory owner in Dongguan, who gave his surname as Lau, said his plant was forced to shut down from Sunday until Tuesday. They were also experiencing some issues in obtaining materials from suppliers due to the virus restrictions, he added.

Money Supply

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There were signs of a slowing here on Friday.

Broad M2 money supply grew 9.2% from a year earlier, central bank data showed, below estimates of 9.5% forecast in the Reuters poll. It rose 9.8% in January. ( Reuters )

A factor in play here is the struggling property market we were noting as 2021 developed.

Household loans, mostly mortgages, suffered a rare contraction of 336.9 billion yuan in February, compared with 843 billion yuan in January, pointing to continued weakness in China’s property market, a major economic growth driver. ( Reuters )

There was more on the property issue here.

Ting Lu, chief China economist at Nomura, said a contraction in medium to long-term household loans was the first since the data was released in 2007, and in line with a 40% drop in new home sales of top 100 developers in January-February.

Nickel

This is a case of when it rains it pours. I am sure many of you know of my past as a LIFFE (options) local which means I have strong views on what has happened here. The disgrace just goes from bad to even worse.

The nickel market at the London Metal Exchange will remain **closed** on Monday. The LME shut down trading last Tuesday after prices surge 250% in two days. ( @JavierBlas)

This is a modern day update on the story that if you owe a bank a pound they own you but if you owe them a million you own them.

Tsingshan has to either pay off the outstanding short positions, which could be as high as $8 billion, or prove it has sufficient deliverable nickel to repay in kind. ( Reuters )

Spreading this out to the wider economy what could go wrong here?

Chinese tycoon Xiang Guangda has to find a way to bail his Tsingshan Holding Group out of a crisis after its bet on nickel prices backfired, fuelling more volatility in a metal essential for the electric vehicles industry.

Comment

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There are a lot of stresses being seen here. If we start with Hong Kong then there must be pressure at the moment on its peg with the US Dollar. That will only be exacerbated by the US raising interest-rates this month especially as a cut from China looks more likely. Switching to the Chinese Yuan there must be pressure too and let us start with this. From abcnews on Friday.

The margin by which the ruble is allowed to fluctuate against the yuan in state-controlled daily trading will be doubled in size to 10% above or below the day’s opening price starting Friday, the China Foreign Exchange Trade System announced.

As a country still trading with Russia China will be getting Rubles with which it can do what exactly? Also we are in a situation where we will at times due to the restrictions be asking what is the exchange rate?

Then we have the other two factors in play. First Covid and the claimed zero covid strategy and then the property market which had its troubles as it was and will not like the implications of the problems elsewhere.

We know what central banks usually do when the property market is creaking….

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