Chinese stocks are down across the board today as Covid-19 cases continue to spread across the country. A new outbreak in Beijing has caused city authorities to raise the possibility of stricter lockdown measures. Other Chinese cities have already implemented harsh lockdown protocols. Now, as Beijing officials rush to track the current outbreak, residents fear their city may be destined for the same. Chinese stocks are not reacting well to the news and are unlikely to rebound anytime soon as the country begins mandatory testing.
Let’s take a look at the companies falling this morning.
What’s Happening With Chinese Stocks
It’s been an unstable quarter for Chinese stocks, and today’s news hints that things are about to get worse. Many of the country’s biggest names began today by plunging into the red. JD.com (NASDAQ:JD) is down 0.37% at the time of writing, while Baidu (NASDAQ:BIDU) has fallen 1.37%.
Other industry giants have seen an even rockier road. Electric vehicle (EV) producers XPeng (NYSE:XPEV) and Nio (NYSE:NIO) are down 3% and 4%, respectively, at the time of writing. And e-commerce titan Alibaba Group (NYSE:BABA) has seen shares fall by 3.2%.
Why It Matters
The recent news out of China calls to mind the troubled economic landscape that we saw during the first Covid-19 outbreak of 2020. The country’s benchmark CSI 300 Index closed out last week down 5%. That marks its lowest point since April 2020, when the first outbreak was running rampant. Additionally, Bloomberg reports, “The onshore yuan slumped to its weakest level in 17 months on concerns about rising capital outflows” while oil prices fell below $100 per barrel.
None of this is good for Chinese markets. And spreading Covid-19 cases aren’t the only thing pushing Chinese stocks down. Last week, many of the aforementioned companies saw shares fall on some news from Didi Global (NYSE:DIDI). When the Chinese ride-sharing giant confirmed plans to delist from the New York Stock Exchange, it spooked investors, sending most major Chinese stocks down with it.
The worsening of an already severe problem is going to exacerbate this trend, causing more investors to pull out of Chinese companies before shares fall even more. New deaths from the virus have already tripled in Shanghai, and China’s government knows that its capital city is likely to see exactly the same situation play out. Testing measures are increasing, but it will likely be weeks before cases start to fall by any significant number. That is what needs to happen for investor confidence in Chinese stocks to be restored. It still feels too far off for comfort.
What It Means
Investors are concerned with the economic consequences of China’s current outbreak. And they should be. The numbers don’t tell an encouraging story. The Financial Times reports, “The IMF has cut its GDP growth forecast from 4.8 per cent to 4.4 per cent for the full year — a particularly sharp contraction from the 8.1 per cent posted last year, hurting both China and the global economy.”
That isn’t even where the negative projections stop. One of China’s leading economists predicts that gross domestic product (GDP) growth will fall by 1.8% in the year’s second quarter. Additionally, the Chinese stocks are facing other constraints. Tesla (NASDAQ:TSLA) recently resumed production at its Shanghai plant, making things more difficult for Nio and XPeng. Investors would be best served to avoid these Chinese stocks until the outbreak is under control.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.