Chinese Markets go down as Investors Worry About Covid restrictions

As investors worried that strict policies to combat Covid-19 would add to the pressures weighing on China's economic growth and corporate profits, Chinese stocks experienced their worst selloff in more than two years, and the yuan fell to its lowest level since late 2020.

The fight against the Omicron variant of Covid-19 adds to a slew of challenges for China's economy and markets, including domestic regulatory crackdowns, the Ukraine war, and a shift toward tighter monetary policy by many central banks to combat galloping inflation. When a serious lockdown in Shanghai entered its fifth week, residents of China's capital, Beijing, filled up on the required Monday in anticipation of a possible lockdown. Beijing officials have begun mass Covid-19 testing of residents and workers in the city's Chaoyang district.

Economists are downgrading their forecasts for Chinese growth, with the International Monetary Fund cutting its 2022 growth forecast for the country to 4.4 percent last week, and banks downgrading theirs. Foreign investors have exited the Chinese stock and bond markets in droves.

The Shanghai Composite and CSI 300 indices fell 5.1 percent and 4.9 percent, respectively, on Monday. It was the biggest percentage drop in a single day for both benchmarks since February 2020, when fears of the rapidly spreading coronavirus in the early days of the pandemic caused sharp declines in Chinese markets following the lunar New Year holiday. By mid-afternoon in Hong Kong on Monday, the offshore yuan had fallen about 1% to around 6.59 per dollar. According to FactSet, it was the lowest since November 2020. The drop was triggered by a divestment last week, which ended months of relative stability.

The market recognizes that "the economic recovery will be delayed, and the situation in China may be more uncertain, particularly in the short term, as a result of the Omicron situation," according to Jason Liu, Asia's chief investment officer at Deutsche Bank's International Private bank.