China is at the centre of a new storm which threatens its economic growth and credibility with the Western world.
Two forces have served to shake its markets, leading to a 5% slump in Hong Kong’s Hang Seng index and a 2.6% decline in the Shanghai SSE Composite index.
First is renewed lockdown measures as Covid returns with a vengeance. Second is chatter that Russia has asked China to provide military assistance in the invasion of Ukraine.
Shenzhen going into lockdown could have negative effects beyond China’s economy. It is known as ‘the world’s factory’ thanks to its concentration of electronics manufacturing. Any prolonged disruption to operations could cause yet another global supply chain crunch.
Russ Mould, investment director at AJ Bell, said: On the UK stock market, China-focused investment trusts were among the biggest fallers including JPMorgan China Growth & Income, Fidelity China Special Situations and Abrdn Asian Income Fund, all down between 4% and 5%.
“The FTSE 100 avoided the sell-off seen in parts of Asia to trade flat early on Monday. Strength in financials, consumer cyclicals and real estate stocks was offset by weakness in basic materials and energy. Another wave of Covid in China could in theory threaten commodities demand, hence why the miners were down.
“Rio Tinto fell by more than its London-listed mining peers after making a $2.7 billion offer to buy out its partner on the Mongolia-based Oyu Tolgoi project, one of the world’s biggest copper mines. Like the project itself, this transaction is not expected to go smoothly. Rio may have to dig a lot deeper to win over Turquoise Hill’s shareholders.
“Most of the big miners overpaid for growth in the last commodities boom which peaked about 10 years ago, and then spent a long time writing down the value of assets, getting rid on non-core operations and streamlining wherever possible. We’ve not seen a return of M&A in the current commodities rally, but history suggests it is only a matter of time.
“Rio Tinto’s move on Turquoise makes strategic sense as it tidies up ownership and gives it a stronger position in the copper sector. However, the fact its share price is down on the Turquoise Hill news would suggest the market is starting to worry once again that it will overpay to get what it wants.”