China, HK stocks sag after Xi emphasizes security, reiterates COVID stance

A man watches a screen showing the live broadcast of Chinese President Xi Jinping attending the opening ceremony of the 20th National Congress of the Communist Party of China, in Shanghai, China October 16, 2022.

SHANGHAI (Reuters) – China and Hong Kong stocks fell on Monday, after Chinese President Xi Jinping talked up national security, while dashing hopes of any changes in growth-hitting zero-COVID policies and property sector curbs.

But China-listed shares’ premium .HSCAHPI over their Hong Kong peers hovered near seven-year highs, as regulators announced market-friendly policies in an apparent effort to stabilize sentiment.

China’s benchmark CSI300 Index .CSI300 fell 0.4% to 3,825.71 by the midday break. The Shanghai Composite Index .SSEC lost 0.1%, to 3,068.83.

Hong Kong benchmark Hang Seng .HSI slipped 1.1%, hitting a 12-year low.

Xi called for accelerating the building of a world-class military, while touting the fight against COVID-19 as he kicked off a Communist Party Congress on Sunday by focussing on security and reiterating policy priorities.

Greater emphasis on national security comes amid heightened geopolitical tensions, Guolian Securities economist Rocky Fan said.

“But the more you pay attention to security, the more you need to sacrifice on efficiency. That would hurt China’s potential economic growth.”

Property shares in both China .CSI931775 and Hong Kong .HSMPI weakened, as Xi’s report signaled little change to the deleveraging campaign that had strangled the indebted sector.

“We believe the ongoing Party congress may not be an inflection point for major policy changes,” Goldman Sachs wrote.

Policymakers will likely stick to “no flooding of easing measures” and a reopening of the economy from strict COVID restrictions will probably be delayed until at least Q2 2023, Goldman said.

China’s daily count of new coronavirus cases has doubled since September.

Bucking the trend, China’s defense stocks .CSI399959 and chipmakers .STARCHIP jumped on Monday as Xi called for strengthening the ability to maintain national security and achieve tech independency.

Interest in China’s military-related stocks .CSI930875 spiked after Xi vowed never to renounce the right to use force to resolve the Taiwan issue.

A-shares’ fall was limited after China’s securities regulator said on Friday it planned to revise rules to make it easier for listed companies to buy back shares.

The watchdog is also considering easing short-term trading rules for overseas funds to attract foreign investment, the Shanghai Securities News reported on Sunday.

Also on Sunday, China’s six biggest state banks issued statements in concert expressing support to the economy.

“As no imminent policy shift has been explicitly confirmed or denied, investors will be in the lookout this week for hints about the extent of Xi’s grip over the party,” said Ales Koutny, portfolio manager at Janus Henderson Investors.