China’s GDP: Hong Kong stocks fall 6% on fears of Xi’s third term trump data

Hong Kong
CNN Business
—

Hong Kong shares had their worst day since the 2008 global financial crisis, just a day after Chinese leader Xi Jinping secured his iron grip on power at a major political gathering.

Foreign investors spooked by the outcome of the Communist Party’s leadership reshuffle dumped Chinese stocks and the yuan despite the release of stronger-than-expected GDP data. They worry that Xi’s tightening grip on power will lead to the continuation of Beijing’s existing policies and further dent the economy.

Hong Kong’s benchmark Hang Seng Index (HSI) fell 6.4% on Monday, marking its biggest daily drop since November 2008. The index closed at its lowest level since April 2009.

The Chinese yuan weakened sharply, hitting a new 14-year low against the US dollar on the land market. In the offshore market, where it can trade more freely, the currency fell 0.8%, hovering near its weakest level ever, even as the Chinese economy grew 3.9% in the third quarter from a year ago, according to the National Bureau of Statistics. Economists polled by Reuters had expected growth of 3.4 percent.

The sharp sell-off came a day after the ruling Communist Party unveiled its new leadership for the next five years. As well as securing an unprecedented third term as party chief, Xi packed his new leadership team with staunch loyalists.

A number of senior officials who have supported market reforms and opening up the economy were missing from the new top team, raising concerns about the future direction of the country and its relationship with the United States. Those pushed aside include Premier Li Keqiang, Vice Premier Liu He and Central Bank Governor Yi Gang.

“It appears that the leadership reshuffle spooked foreign investors into offloading their Chinese investments, triggering a big sell-off in Hong Kong-listed Chinese stocks,” said Ken Cheung, chief Asian currency strategist at Mizuho bank.

The GDP data marked a rebound from the 0.4% increase in the second quarter, when China’s economy was hit by widespread Covid shutdowns. Shanghai, the country’s financial center and a major global trade hub, was closed for two months in April and May. But the growth rate was still below the annual official target set by the government earlier this year.

“The outlook remains bleak,” Julian Evans-Pritchard, senior China economist for Capital Economics, said in a research note on Monday.

“There is no prospect of China lifting its zero-Covid policy in the near future, and we do not expect any meaningful relaxation until 2024,” he added.

Along with a further weakening of the global economy and a sustained decline in China’s real estate, any headwinds will continue to weigh on the Chinese economy, he said.

Evans-Pritchard expected China’s official GDP to grow by just 2.5% this year and by 3.5% in 2023.

Monday’s GDP data was originally scheduled for release on October 18 during the Chinese Communist Party Congress, but was postponed without explanation.

The possibility that policies such as Zero-Covid, which have resulted in widespread lockdowns to contain the virus, and “Shared Prosperity” – Xi’s efforts to redistribute wealth – could be escalated is a cause for concern, Cheung said.

“With the Politburo Standing Committee composed of President Xi’s close allies, market participants are reading the implications as President Xi’s consolidation of power and policy continuation,” he added.

Mitul Kotecha, head of emerging markets at TD Securities, also pointed out that the disappearance of reform-minded officials from the new leadership bodes ill for the future of China’s private sector.

“The departure of supposed pro-stimulus officials and reformers from the Politburo Standing Committee and replacement with allies of Xi suggests that ‘Shared Prosperity’ will be the overarching thrust of officials,” Kotecha said.

Under the banner of the “Common Prosperity” campaign, Beijing launched a sweeping attack on the country’s private enterprise, shaking nearly every industry to its core.

“The [market] the reaction in our view is consistent with the reduced prospects for significant stimulus or changes to zero-covid policy. Overall, the prospects for a re-acceleration in growth are limited, Kotecha said.

In the tightly controlled domestic market in China, the Shanghai Composite index fell 2%. The technology-heavy Shenzhen Component Index lost 2.1%.

The Hang Seng Tech Index, which tracks the 30 largest technology companies listed in Hong Kong, plunged 9.7 percent.

Shares in Alibaba ( BABA ) and Tencent ( TCEHY ) — the crown jewels of China’s technology sector — both fell more than 11%, shedding a combined $54 billion from the stock market.

Sales spilled over to the US as well. Shares in Alibaba and several other leading Chinese stocks traded in New York, such as EV companies Nio ( NIO ) and Xpeng , Alibaba rivals JD.com ( JD ) and Pinduoduo ( PDD ) and search engine Baidu ( BIDU ) all advanced strongly down. Thursday afternoon.