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Wild Ride in China Stocks Triggers Memories of 2018 Meltdown

(Bloomberg) — A bout of fresh volatility is hitting Chinese equities, evoking memories of the 2018 meltdown, as the war in Ukraine threatens to complicate the Asian nation’s plans to ease policy and potentially worsen its already strained relations with the U.S.

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Traders were taken for a wild ride on Wednesday as stock benchmarks in China and Hong Kong both tumbled by more than 3% in early afternoon trading, only to pare bulk of those losses at the close. Still, the CSI 300 Index ended 0.9% lower in a sixth day of declines — the longest losing run since March 2020, and the Hang Seng Index finished at its lowest since July 2016.

Concern is growing that surging commodity costs will fan inflation and limit the Chinese central bank’s ability to ease policy. Worried about the impact surging prices will have on the economy, China is said to consider buying or increasing stakes in Russian energy and commodities companies, moves that could raise tensions with the U.S..

Separately, the U.S. could take “devastating” action against Chinese companies that defy Russian sanctions, the New York Times reported, citing Gina Raimondo, the commerce secretary. In 2018, the CSI 300 Index lost about a quarter of its value in a rout triggered by the Sino-U.S. trade war.

“This is really similar to what happened in 2018,” said Chen Shi, fund manager at Shanghai Jade Stone Investment Management Co. “There is a lot of momentum-driven trading, and with the increased level of algorithm-driven trading, volatility is exacerbated. Investors are responding with more extreme sentiment when panic is in the air.”

The CSI 300 has lost 27% from a peak about a year ago, fueled by a slump in China’s property market and Covid-zero policy. Sentiment soured further on Wednesday as Norway’s $1.3 trillion sovereign wealth fund announced its exclusion of Li Ning Co. due to the risk that the sportswear maker contributes to serious human rights violations in Xinjiang. The move stoked worries about a potential retreat of other long-term investors. Li Ning plunged 9%.

“Norway sovereign fund’s offloading Li Ning is triggering some worries about the attitude over Chinese and Hong Kong stocks in the future,” said Castor Pang, head of research at Core Pacific Yamaichi.

Meanwhile, China’s producer price index rose 8.8% from a year earlier, compared with estimates of 8.6%, official data showed today. Economists at Goldman Sachs Group Inc. expected China’s economy to grow only 4.5% this year, a full percentage point below the gross domestic product target of about 5.5% set last week. Covid infections topped 500 for a third consecutive day Wednesday, with cases rising in major cities such as Beijing and Shanghai.

“A lot of factors at play here: Covid hitting highs in China, inflation coming in higher than expected, and news overnight that China may be considering investing in Russian assets. This increases the risks of a global response against China,” Bloomberg Intelligence Strategist Marvin Chen said.

Cracks are also showing up in China’s bond market. Yields on the 10-year sovereign note rose to 2.86%, the highest this year, as Commerzbank AG economist Hao Zhou pointed to capital outflows.

READ: China Sovereign Bonds Tumble From No. 1 Ranking as Funds Flee

“We can’t see any rebound signals at the present,” said Yan Kaiwen, analyst at China Fortune Securities. The market is concerned about inflation because of the higher prices for oil and other commodities, which will have a negative impact on the global economy, he said.

The Hang Seng Index ended 0.7% lower, bringing its loss this week to nearly 6%.

Investors remain jittery in Hong Kong’s battered stock market, which was the world’s worst-performing major gauge last year following a yearlong regulatory crackdown. HSI’s price-to-book ratio has hit new lows while a continued surge in Covid cases and a looming city-wide lockdown added to the negative sentiment, investors say.

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