China haemorrhaging billions of dollars as investors panic over Russia and Covid

China plotting to exploit Russia 'template' to expand into Indo-Pacific

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Around $6billion (£4.53billion) worth of Chinese stocks has reportedly been sold off in the first three months of the year. Since the start of 2022 Hong Kong’s Hang Seng stock market index has fallen nearly five percent with heavy losses in recent weeks from major tech firms such as Alibaba and Tencent. The Russian invasion of Ukraine has sparked many western firms to re-evaluate their corporate ties with a mass withdrawal from Russia being seen from companies ranging from Shell and BP to Mcdonald’s. Despite an initial policy described as “pro-Russian neutrality” China has increasingly tried to distance itself from Russia, insisting that it would never attack Ukraine and doesn’t want sanctions to affect China.

This may not be enough to stem the offloading of struggling Chinese shares though, with JP Morgan recently branding Chinese tech stocks as “un-investable”.

Craig Botham, Chief China+ Economist at Pantheon Macroeconomics, explained there were “a few things at play” with “fear that China could also be subject to sanctions, if it is helping Russia bypass existing arrangements, or if it provides military assistance”.

While China has publicly rejected such possibilities the country remains well placed to offer a lifeline to Russia.

According to Mr Botham part of the sell-off in Chinese investments may even be Russia led with Russia selling off Chinese government bonds, one of its few assets not frozen by sanctions, in order to finance itself.

This week China’s Ambassador to Russia Zhang Hanhui called on Chinese businesses to “fill the void” created by the exodus of western firms from Russia.

Mark Williams, Chief Asia Economist at Capital Economics, commented: “The sanctions on Russia have made people question whether you can really ignore the politics in an autocracy.

“If relations between China and the West deteriorated, how safe would investments there be?

According to analysts at Abrdn global markets are now being “driven by fear” whith funamentals being ignored. 

Fears of China falling under future sanctions are only the latest in a number of issues weighing on investor confidence in the world’s second-largest economy, in what Abrdn describe as a “perfect storm.”

Mr Williams explained: “The argument for investing in China was that you could overlook the politics and benefit from faster growth.

“Now though, China’s growth is facing headwinds from the ongoing COVID outbreak across the country and from Xi Jinping’s heavy-handed approach to economic management.”

China has been rigorously sticking to a zero-Covid policy which has seen key economic areas such as Shenzhen put into lockdown with severe knock-on effects for supply chains.

In Shenzhen’s case this has involved putting over 17 million people into lockdown and disrupting one of the world’s busiest ports.

Writing in a research note Mr Botham said: “Some larger firms reportedly are trialling Olympic-style “bubbles” for their staff, as in the case of Foxconn in Shenzhen.

“This mitigates the impact of Covid-suppression policies, but increases the cost of operations; workers need isolated accommodation, catering, and working arrangements.

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“This is simply unviable for smaller firms.

“We expect the drag on exports to China to increase in the full-month numbers.”

Another problem has been a rising trend of government intervention with regulatory crackdowns affecting both big tech and property.

Since last year Beijing has been passing sweeping laws covering areas from competition to data security which has seen billions wiped off the value of some of China’s largest tech companies.

Strict rules around property developer borrowing, known as the “three red lines” has also played a role in a growing debt crisis among Chinese developers, most prominently seen in the struggles of Evergrande which was forced to restructure after defaulting in December.

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