Xi Leaves China Stocks in Tatters With Record Post-Congress Drop

(Bloomberg) — China stocks’ frenzied week has ended how it began: with jaw-dropping losses.

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Distraught over President Xi Jinping’s power grab and his recommitment to the Covid Zero strategy at the Communist Party Congress, investors rushed to exit Chinese shares, triggering an epic rout on Monday. The selloff resumed with a vengeance on Friday, sending an index of Chinese shares traded in Hong Kong to the lowest level since 2008 and turning it into the world’s worst-performing stock gauge for the year.

A loss of almost 9% this week in the Hang Seng China Enterprises Index also meant that the measure capped its worst ever five-day loss following any party congress since the gauge’s inception in 1994.

While optimism has been in short supply in China’s markets for a long time and expectations from the leadership gathering weren’t particularly high, the intensity of this week’s losses has shocked local and global investors alike.

“I was unprepared for the depth of this selloff,” Nirgunan Tiruchelvam, head of consumer and Internet at Aletheia Capital in Singapore, said by phone. “A lot of investors and analysts were caught with their pants down.”

His views on the magnitude of the rout were echoed by fund managers at Edmond de Rothschild Asset Management in Paris and Baring Asset Management Asia Ltd. in Hong Kong. For Sun Jianbo, president at China Vision Capital based in Beijing, “the market is in chaos” and hopes for any relaxation in Covid controls were dashed “over and over again.”

At the twice-a-decade meeting, Xi stacked the leadership ranks with allies, limiting the scope for opposition to his strategies that have sought to exert greater state control over markets and the economy. Frustrated and angry, international investors pulled a record $2.5 billion from mainland stocks on Monday alone. The HSCEI gauge sank 7.3% in its biggest plunge since 2008 that day.

The reaction was even more violent in the nation’s US-listed equities, with the Nasdaq Golden Dragon China Index tanking a record 21% intraday.

“The magnitude was surprising,” said William Fong of Baring. “No one even cared about fair value of companies and just wanted to sell. I think the future for the stock market is still bumpy. Lots of people will continue selling, because it’s very very difficult to price in the future under the new leadership.”

While sentiment seemed to somewhat stabilize in the three days following Monday’s rout, the resumption of losses Friday was a reminder of the risks of dip buying when it comes to Chinese shares. The HSCEI lost another 4.1% on the day as the expiry of monthly futures and options contracts on the gauge as well as news of spreading Covid restrictions boosted volatility. The selling also came ahead of expected appointments of key party and cabinet roles in the coming weeks.

Intensifying Sino-American tensions didn’t help, with the Hang Seng Tech Index tumbling 5.6% on Friday. The top US official overseeing export controls said he expects a deal with global allies to limit shipments of chip-production equipment to China in the near term. Such a move would expand the US’s efforts to keep cutting-edge semiconductor technology out of China.

On the mainland, China’s benchmark CSI 300 Index capped the week with a loss of over 5%, the worst in 15 months.

“The market is still in a downward trend” given the disappointment from the party congress, weak consumption, lackluster industrial profits and sporadic Covid outbreaks across the country, said Yan Kaiwen, an analyst with China Fortune Securities Co. in Shanghai.

Amid all the gloom, some money managers have used the market turmoil as an opportunity to buy as they look to take advantage of historically-low valuations.

“Some of those traded in the US were at a big discount from their prices in Hong Kong and we took advantage of that price discrepancy,” said Tom Masi, a New York-based portfolio manager at GW&K Investment Management. Patient investors are going to “benefit handsomely from having a position in China,” he said.

Feeling a “heightened sense of excitement” as stocks plunged, Robert Horrocks, chief investment officer at Matthews Asia in San Francisco, said nothing had fundamentally changed for China’s policy, hence little reason for a revaluation of businesses. For Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors LLC in New York, the fact that no one wants to invest in China may mean “there’s big opportunities and that’s reflected in the much cheaper valuations for China.”

For now, bearish sentiment still prevails. As traders struggle to determine how long the rout will persist, fresh lockdowns are being imposed from Wuhan, coronavirus’s original epicenter, to China’s industrial belt on the east coast are making matters worse.

“Hard to say how the selloff plays out, but again, a sustained recovery in investor confidence is still dependent on developments like changes to China’s zero COVID policy,” said Christina Woon, investment director for Asia equities at abrdn plc in Singapore. “While we have seen some movement here, it is still a story in its infancy.”

–With assistance from Catherine Ngai, Lin Zhu, Abhishek Vishnoi, Norah Mulinda and Ellie Harmsworth.