Hong Kong stocks tumble after Xi appointments fan economic fears; yuan weakens

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HONG KONG/SHANGHAI -Hong Kong stocks tumbled on Monday and the yuan weakened against the dollar after the new membership line-up of China’s top governing body heightened fears that Xi Jinping will double down on ideology-driven policies at the cost of economic growth.

The Hang Seng index slumped more than 4 percent in early trade.

Hong Kong-listed shares of tech giants Alibaba Group Holding Ltd and Tencent Holdings Ltd plunged more than 7 percent and the Hang Seng Tech Index fell more than 5 percent to a record low. Hong Kong-listed Chinese developers slid more than 7 percent.

Xi secured a precedent-breaking third leadership term on Sunday, and introduced the new Politburo Standing Committee stacked with loyalists.

The appointments “show China moving from economic pragmatism to political ideology,” said Ales Koutny, emerging markets portfolio manager at Janus Henderson Investors.

“The message here is clear: COVID Zero lockdowns, shared prosperity agenda and sectorial crackdowns are not going anywhere,” he said, adding that he believed these risks would limit China’s annual economic growth to just 2-3 percent.

China’s gross domestic product (GDP) rose 3.9 percent in the July-September quarter year-on-year, official data showed on Monday, rebounding at a faster-than-expected pace but that was not enough to cheer investors.

Stocks declines were more moderate for mainland markets which are less vulnerable to foreign selling and which were also bolstered by a surge in Chinese defence-related stocks as investors bet geopolitical tensions, particularly over Taiwan, will intensify.

China’s bluechip CSI300 index dropped roughly 2 percent, while the Shanghai Composite Index lost 1 percent.

Offshore yuan fell to as low as 7.2790 per dollar , near record-low levels. Onshore yuan also dropped after the People’s Bank of China set the mid-point rate at its weakest level since June 1, 2020.

Goldman Sachs analysts wrote in a client note on Sunday that the lack of recognised market-oriented economic reformers among China’s top leadership meant the risk premium for China offshore equities “could stay elevated in the short run”.

They added that they expect a gradual relaxation of China’s strict zero-COVID policy stance to start in the second quarter of next year.

Stocks in tourism, leisure, and hotel & catering – sectors that have been ravaged the zero-COVID policy – also saw steep declines.

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