Chinese stocks are down across the board today as Covid-19 cases continue to spread across the country. A new outbreak in Beijing has prompted city officials to raise the possibility of tougher lockdown measures. Other Chinese cities have already implemented tough lockdown protocols. Now, as officials in Beijing race to track the current outbreak, residents fear their city is destined for the same. Chinese stocks are not reacting well to the news and are unlikely to rebound anytime soon when the country begins mandatory testing.
Let’s take a look at the companies that are falling this morning.
What’s going on with Chinese stocks
It’s been a rocky quarter for Chinese equities, and today’s news suggests things are about to get worse. Many of the biggest names in the country started today by diving into the red. JD.com (NASDAQ:J.D.) is down 0.37% at the time of writing, while Baidu (NASDAQ:BIDU) fell 1.37%.
Other industry giants have had an even tougher road. Electric vehicle (EV) producers XPeng (NYSE:XPEV) and Nio (NYSE:NIO) are down 3% and 4%, respectively, at the time of writing. And the titan of e-commerce Alibaba Group (NYSE:BABA) saw its shares fall 3.2%.
why is it important
Recent news from China is reminiscent of the troubled economic landscape we saw during the first outbreak of Covid-19 in 2020. The country’s benchmark CSI 300 closed last week down 5%. This marks its lowest point since April 2020, when the first outbreak was raging. Besides, Bloomberg reports, “The onshore yuan fell to its weakest level in 17 months on concerns over rising capital outflows” as oil prices fell below $100 a barrel.
None of this is good for Chinese markets. And the spread of Covid-19 cases isn’t the only thing dragging Chinese stocks down. Last week, many of the aforementioned companies saw their shares plummet following news of Didi Global (NYSE:HAVE I GOT). When the Chinese carpooling giant confirmed its intention to withdraw from the New York Stock Exchangeit spooked investors, sending most major Chinese stocks tumbling.
The worsening of an already serious problem will exacerbate this trend, forcing more investors to exit Chinese companies before stocks fall even further. New deaths from the virus have already tripled in Shanghai, and the Chinese government knows its capital is likely to see the exact same thing happen again. Testing measures are increasing, but it will probably be weeks before cases start to drop significantly. This is what needs to happen for investor confidence in Chinese equities to be restored. It still feels too far for comfort.
What this means
Investors are worried about the economic consequences of the current outbreak in China. And they should be. The numbers do not tell an encouraging story. the FinancialTimes reports: “The IMF has cut its forecast for GDP growth from 4.8% to 4.4% for the year as a whole – a particularly sharp contraction from the 8.1% posted last year, which has hurt both China and the global economy.
That’s not even where the negative projections end. One of China’s leading economists expects gross domestic product (GDP) growth to fall 1.8% in the second quarter of the year. In addition, Chinese equities face other constraints. You’re here (NASDAQ:TSLA) recently resumed production at its Shanghai factory, making things more difficult for Nio and XPeng. Investors would be better served to avoid these Chinese stocks until the outbreak is under control.
At the date of publication, Samuel O’Brient held (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.