The decline of Chinese financial markets amid unprecedented protests… and the economy is “in a game of tug-of-war”

Hong Kong (CNN) — China’s main stock indices and currency opened sharply lower on Monday, as widespread protests against the country’s strict coronavirus restrictions over the weekend fueled investor concerns.

Hong Kong’s Hang Seng Index fell 4.2% in early trade. It has since pared some losses and was last trading down 2%. The Hang Seng Index, a leading index that tracks the performance of mainland Chinese companies listed in Hong Kong, lost 2%.

The Shanghai index on the Chinese mainland briefly fell 2.2%, before paring losses to 0.9% below Friday’s close. Shenzhen fell 1.1%.

On Monday morning, the Chinese yuan, against the US dollar, fell briefly by 0.9%. It was last down 0.6% at $7.206.

Stephen Innes, managing partner of SPI Asset Management, said the currency market may be the “simplest barometer” for gauging what domestic and foreign investors think.

The markets tumble comes after protests erupted across China in an unprecedented challenge against the country’s increasingly strict and costly coronavirus policy.

Over the weekend, residents gathered in the country’s largest cities, from financial hub Shanghai to capital Beijing, to mourn the dead in the Xinjiang fire, speak out against the anti-COVID-19 policy and advocate freedom and democracy.

Such widespread scenes of anger and defiance, some of which stretched into the early hours of Monday morning, are exceptionally rare in China.

Economics in a game of tug of war?

On Friday, a day before the protests began, China’s central bank cut the amount of liquidity that lenders must hold in reserve for the second time this year. Most banks’ reserve requirement ratio (RRR) has been cut by 25 percentage points.

The move was intended to shore up an economy crippled by strict Covid restrictions and a faltering real estate market. But analysts don’t think the move will have much impact.

China’s economy is currently caught in a tug-of-war between weak economic fundamentals and rising hopes for the country’s reopening, said Ennis of SPI Asset Management.

“For official institutions in China, there are no easy paths. Accelerating reopening plans as new COVID cases rise is unlikely,” he added. “Mass protests would tip the scales significantly in favor of a weaker economy and would likely be accompanied by a massive surge in Covid cases, leaving policymakers with a big dilemma,” he added.

He believed that stocks and the Chinese currency are likely to be priced in the near term based on “uncertainty” about Beijing’s response to the ongoing protests, and he expects social discontent to increase in China in the coming months.

But he said that in the long term, the most realistic and likely outcome should be “a faster easing of Covid restrictions once the current wave subsides”.

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