Chinese stocks and yuan fall after US Fed becomes more hawkish

SHANGHAI (Reuters) – Chinese stocks fell to near 16-month lows and the yuan fell against the dollar on Thursday as global investors feared the U.S. Federal Reserve was moving aggressively to rein in inflation.

China’s blue-chip CSI 300 index closed down nearly 2% to its lowest level since September 30, 2020, and the Shanghai Composite index ended down 1.8%.

The CSI Smallcap 500 index and the ChiNext start-up market fell 2.6% and 3.6% respectively.

More than 94% of stocks listed on China’s A-share markets fell, according to data from financial information services provider Wind.

The fall came amid a global pullback in equities after US Federal Reserve Chairman Jerome Powell warned inflation remained above the Fed’s long-term target and chain issues supply may be more persistent than previously thought.

“The recent performance of overseas markets is a factor weighing on A-share markets,” said Zhang Yangbing, analyst at Zheshang Securities. “Additionally, investors are concerned that there will be more corrections in overseas markets when mainland markets are closed during the holidays.”

Markets in mainland China will be closed for China’s week-long Lunar New Year holiday, which begins Jan. 31.

Overseas investors were big sellers of Chinese equities on Thursday, with data from Refinitiv showing 11 billion yuan outflows through the northern arm of China’s Stock Connect program.

Data from East Money Information showed Thursday’s outflows were the largest since July 24, 2020.

Losses were led by tech stocks, with an index tracking the IT sector down 3.9%. The shares of semiconductors and new energies lost more than 3% each.

In Hong Kong, the Hang Seng index fell 2.5% and the Chinese corporate index fell 3%, forecast for its biggest daily percentage decline since Sept. 20.

The Chinese currency also weakened sharply, heading for its biggest one-day loss against the dollar since June 17, 2021, as rising US yields lifted the greenback.

“The main takeaway is that the rate hike cycle (in the US) is about to begin,” wrote Philip Wee, senior FX strategist at DBS Group.

The market, which had turned neutral ahead of the Fed meeting, is now bracing for a more aggressive frontloading of rate hikes, he added. Fed funds futures are now forecasting no less than five rate hikes this year.

The yuan fell about 0.6% against the dollar, after the People’s Bank of China set a significantly lower midpoint rate at 6.3382 yuan to the dollar, from 6.3246 a day earlier. This is the largest drop in the average daily rate set by the central bank since December 20.

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