The Hong Kong stock market plunged on Monday, falling 5% to six-year lows as the city battled its worst COVID outbreak to date. To make matters worse, the city of Shenzhen, just across the border in mainland China, is locking down as cases emerge in 17 Chinese provinces.
Shenzhen is China's equivalent of Silicon Valley. It has the highest per-capita wages in the country and is home to a large cluster of tech companies, including the headquarters of WeChat superapp operator Tencent Group Holdings (TCTZF) (HK:0700). The government put all 17 million Shenzhen residents into a week-long lockdown on Sunday night, with public transport halted. The city said it will conduct three rounds of testing to assess the outbreak.
As a result, Chinese tech stocks are selling off particularly hard. The Hang Seng Tech Index crashed 11% by Monday's close, its worst-ever one-day showing, dragging the broader Hang Seng to its lowest level since March 1, 2016. By contrast, Japanese shares moved higher, with the Topix up 0.7%, while Australian shares also advanced.
E-commerce operator JD.com (JD) (HK:9618) ended down 14.8% in Hong Kong, with rival Alibaba Group Holding (BABA) (HK:9988), China's largest e-commerce company, down 11.5%. Groceru delivery app Meituan (MPNGY and HK:3690) was the second-worst performer on the Hang Seng, down 16.8% at the close.
Tencent fell 9.8%, to its lowest point since November 2019. All companies with major operations in Shenzhen are affected by the restrictions on movement. For now, only essential workers in medical fields, grocery stores and courier services can show up to work. The smartphone maker Xiaomi (XIACY and HK:1810) surrendered 8.6%.
Foxconn Technology (HNHPF and TW:2354), one of the major suppliers and assemblers for Apple (AAPL) , said it would be shutting down its operations in Shenzhen in compliance with the lockdown. The Taiwanese company operates a walled campus at Foxconn Longhua Science & Technology Park, its largest single manufacturing base, with hundreds of thousands of workers in a complex of 15 factories.
Foxconn, which officially is called Hon Hai Precision Industry, assembles most of Apple's iPhones in Shenzhen. However, the fallout for Foxconn stock so far has been limited, with the Taipei-listed shares down just 0.5% by Monday's close. It said it will attempt to shift production.
Another Taiwanese supplier to Apple, Unimicron Technology (TW:3037), says it also has suspended its operations in Shenzhen. Unimicron, which makes printed circuit boards and substrates for chips, also supplies Intel (INTC) . Unimicron shares fell 4.5% in Taipei.
Reuters reported that the Shenzhen government may start to allow companies to resume operations if they create a "closed-loop" bubble, with workers living on site. But those plans are yet to be firmed up. The Port of Shenzhen is a major point of origination for tech parts and goods to ship around the world and faces disruption, although port operators in the past have argued their staffs are essential workers.
COVID makes a comeback
Mainland China is also contending with its most severe outbreak of COVID since the original outbreak of the pandemic, although the overall infection rate is still modest by Western standards. It reported 1,807 local symptomatic cases on Sunday, the highest figure in two years, and triple the number from the previous day. China has a strange way of tallying cases, not counting positive COVID tests if the patient does not display symptoms.
The CSI 300 index of the largest mainland-listed companies fell 3.1%. Other tech-focused markets in Asia also sold off, with the Kospi in South Korea down 0.6% and the Nasdaq-style Kosdaq index 2.2% lower. In Taiwan, the Taiex ended flat, inching 0.01% into the red.
Besides Shenzhen, there are localized shutdowns in other parts of China, particularly the northeast. The province of Jilin is partially locked down because it accounted for three-quarters of Sunday's new cases, while schools have been closed in Shanghai.
Property developers were also whacked on Monday, faced with trouble selling apartments face-to-face at a time their finances already are stretched. The mass-market homebuilder Country Garden Holdings (HK:2007) plummeted 18.9%, denying rumors on social media that it is in financial trouble. Its property-management arm, Country Garden Services Holdings (HK:6098), was the worst performer on the Hang Seng, which is saying something, as the subsidiary's shares descended 21.5%.
Longfor Group Holdings (HK:0960) also fell sharply; the Beijing-based developer's shares were down 12.2%. It has a portfolio of properties across China, but with a concentration in the northeast.
U.S.-listed Chinese stocks are adding to heavy losses from last Friday after the U.S. Securities and Exchange Commission cited the first five companies that risk delisting if they do not provide accounts that can be reviewed by the SEC's auditing arm. I explored the ramifications of that move late last week.
Hong Kong is in the throes of its worst COVID outbreak. The city reported 32,430 new cases on Sunday, and its 264 deaths bring the total to 3,993 fatalities. That means Hong Kong has now surpassed the number of dead in Wuhan's original outbreak, with 3,869 deaths recorded in Wuhan in the spring of 2020, and none on the official record since.
The death rate is particularly high per capita in Hong Kong, at 3.44 per 100,000 residents, the highest level in the world. Due to the unpopularity of the government, anti-vax propaganda and the lack of early high COVID numbers, many elderly residents did not get vaccinated in Hong Kong. Half the deaths have been among nursing home residents, while 90% of the fatalities have been in patients who are not fully vaccinated.