The Perfect Enemy | China Stocks Slide on Covid Zero Adherence, Hawkish Fed Comments

(Bloomberg) — Chinese stocks snapped a two-day rally sparked by reopening speculation, as the nation’s top health body reiterated its commitment to Covid Zero and the Federal Reserve’s hawkish comments led to a global selloff.

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A gauge of Chinese stocks trading in Hong Kong slumped as much as 2.7%, retreating after a two-day advance of over 8%. The Hang Seng Index also fell more than 2%, with stocks tied to reopening, including casinos and retailers, among the worst performers.

Read: How a Mysterious China Screenshot Spurred $450 Billion Rally

Stocks soared earlier this week as unverified social media posts triggered frenzied speculation that after years of adhering to Covid Zero, authorities are outlining measures to open up the economy. Such hopes were given a harsh reality check after the National Health Commission said its zero-tolerance approach remains the overall strategy to fighting Covid-19.

“The reopening bounce was bound to hit air pockets lower without a formal acknowledgment from party officials,” said Stephen Innes, a managing partner at SPI Asset Management. Yet even after the adherence to Covid Zero by health officials, “investors are still thinking about where there is smoke, there is fire. And will be looking for any subtle signs the reopening is getting pushed up.”

Yum China Holdings Inc. and Haidilao International Holding Ltd. plunged at least 5% each in Hong Kong, while a Bloomberg index of Macau casino shares fell as much as 3.1%. On the mainland, the CSI 300 Index fell as much as 1%.

Read: China Reopening Stocks Fall as Govt Reiterates Firm Covid Rules

The last couple of weeks brought wild swings for Chinese markets — first with a historic selloff following policy disappointment from the Communist Party congress, then a sudden surge over the last two days.

All of this came even as China had shown little indication of changing its official Covid stance, with the latest lockdown of the area around Foxconn Technology Group’s main plant in Zhengzhou highlighting that economic growth still takes a back seat over pandemic control.

“I think the market may be misinterpreting the pace of reopening, as it may only come gradually like in Hong Kong, with a reduction in quarantine times likely as the first step,” said Marvin Chen, a strategist at Bloomberg Intelligence. “Local governments are still likely to adhere to Covid-Zero until broader measures are announced.”

–With assistance from Charlotte Yang.