China reopening plays saw a severe setback during Monday trading in Hong Kong as concern mounts about China's attempts to ease its Covid rules.
Casino operator Sands China (HK:1928) was the worst performer in the Hang Seng Tech Index here on Monday as it fell 7.7%. Casino stocks have been hammered by the inability of mainland gamblers to travel easily to Macau and hit the tables.
Nationwide hotpot restaurant chain Haidilao (HK:6862) was not far behind, with a 7.1% drop. It has been a bellwether stock for the prospects of China opening up because restaurants are some of the first venues to see restrictions or forced closures when outbreaks of Covid-19 rear their peak.
Though Hong Kong stocks have gained more than 20% so far in November, it appears the optimism backing that rally is easily dented.
The Hang Seng Index fell 1.9% in Hong Kong, with the Hang Seng China Enterprises Index of mainland-focused companies down slightly more at 2.0%. The Hang Seng Tech Index, down 3.0%, saw only one of its 30 components advance, with the chipmaker Hua Hong Semiconductor (HK:1347) able to eke out a 0.4% nudge higher.
Otherwise, Hong Kong trading saw a sea of red ink. On the mainland, the CSI 300 Index of the largest listings in Shanghai and Shenzhen fell 0.9%.
We've seen Alibaba Group Holding ( (BABA) and HK:9988) as well as e-commerce rival JD.com ( (JD) and HK:9618) come in with recent earnings that beat expectations while top-line revenue disappointed, a sign that consumers aren't confident in their spending. That's despite massive promotions over the "Singles Day" promotion through Nov. 11. For the first time, neither Alibaba with its Taobao and Tmall platforms nor JD.com released sales figures for how they did over Singles Day, which like Black Friday has now stretched into a weeks-long promotion period. Read into that what you will.
Alibaba said sales were "in line" with last year's gross merchandise volume. JD said it had a "record-breaking" 11-day Singles Day promotion, but whether it broke the record for, say, left-handed people buying cashmere sweaters that are pink or it was a record for total sales, it did not disclose. The Singles Day performance is typically interpreted as a sign of the health of the consumer economy in China.
"Their results were probably too bleak to be revealed, so the platforms chose to keep them a secret," e-commerce analyst Li Weidong said, according to the South China Morning Post.
JD shares ended Monday down 5.2%, while Alibaba closed with a 4.8% loss. Alibaba has lost 33.8% of its value this year, with JD down 23.6%.
The reaction of these stocks is an indication of how fragile sentiment is despite a recent rally in China plays driven by optimism that the country would eliminate its harshest lockdown methods. The Hang Seng Index had gained 23.1% since the end of last month and last Friday's close.
Mainland China's stock markets are easily capable of run-ups of 60% or more in a single year once they build momentum. They're driven by the sentiment of retail investors. While Hong Kong's market tends to be more tempered, China bulls have long been waiting for signs that the market has bottomed and that it's time to jump back in.
There has been little but bad news for Hong Kong listings since early 2021, making them the worst performers of that year. Until this recent rally they looked set to cement the "Asia's worst" position yet again for 2022.
A number of Wall Street sell siders have come forward of late to suggest they are shifting to an optimistic view of Chinese stocks. Bank of America (BAC) , Goldman Sachs (GS) , Merrill Lynch and Morgan Stanley (MS) have all made positive noises about mainland markets. The most notable turnaround comes at JPMorgan Chase (JPM) , which earlier this year said Chinese Internet stocks were "uninvestable" due to the pressure they faced from both U.S. and Chinese regulators. It said the market meltdown in October caused by the consolidation of power under President Xi Jinping, which saw Chinese stocks lose US$6 trillion in value, makes for a buying opportunity.
As of Sunday, China recorded 27,095 new Covid cases after notching 24,435 the day before. This weekend also saw China report deaths due to Covid, with three people dying in Beijing, the first time in months that China has reported a fatality as a direct result of the disease.
The capital of northern Hebei Province, Shijiazhuang, had been rumored to be serving as a test-case city for opening. However, the local government said on Sunday night it has locked down the city for five days and will be conducting Covid tests of the population.
Likewise, the most-populated district of the city of Guangzhou is also locking down. Baiyun District, site of the city's major international airport, will be shuttered all week, the local authorities said, with the health authorities saying on WeChat that the "prevention and control situation is grim."
Chinese cities and local authorities are struggling to pay for the constant testing that they had been requiring of residents. Frustration has boiled over at times, with Guangzhou the site of an angry march through the streets last week. Demonstrators smashed through anti-Covid barriers designed to restrict them to their homes and remonstrated with the "Big White" hazmat-clad health workers on site.
