Protests over China’s Covid containment may cast a shadow over the nation’s assets and broader risk-on sentiment in global markets as trading resumes after the weekend.
Before it becomes clear how Beijing will respond to the latest surge in discontent, the threat of rising social instability and government crackdowns is likely to drive investors to safe-haven assets from the dollar to the yen and government bonds. Demand for commodity stocks and currencies linked to trade with China, including the Australian dollar and the Korean won, could weaken.
The dramatic turn of events adds fresh uncertainty to the outlook for the world’s No. 2 economy and its markets, just as the recent loosening of virus controls and massive property rescue efforts have helped Chinese shares post a remarkable rebound. Protests sparked by a deadly fire at a block of flats in a western city also threaten to further dilute the moderate, well-anticipated monetary easing step taken by China’s central bank on Friday.
“Sentiment may suffer as the protests fuel concerns about social instability in China and foreign investors may reduce exposure to Chinese investments,” said Ken Cheung, chief Asian currency strategist at Mizuho Bank Ltd. in Hong Kong. “The Zero Covid policy seems to be reaching its tipping point. Further easing or refinement of Covid measures will be needed to limit discontent.”
The yuan is likely to weaken, while the asylum seeker could boost the greenback, Cheung said.
Optimism has resurfaced in Chinese markets since Beijing eased lockdown periods and dialed back testing on Nov. 11, sparking a rally that added almost $370 billion to the value of stocks in the MSCI China index. The yuan jumped to an eight-week high earlier this month, while tighter measures to ease property woes also led to a rebound in developer bonds.
However, the protests may dampen sentiment, especially now that some investors are beginning to think Chinese stocks may have reached a crossroads after recent sharp gains. That came despite a growing chorus of bullish China appeals to Wall Street, which cited cheap valuations and more favorable policies.
In global markets, unrest in China could also dampen hopes for emerging market currencies to record their best monthly rally in six years.
“The market volatility may continue for some time until people are convinced of the consistency of the logic behind” China’s Covid management measures, said Tommy Xie, head of Greater China research at Oversea-Chinese Banking Corp. “Any time the implementation goes against what is being put in the Covid policy, the market will be confused and risk appetite will take a hit.”
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