Business: After Powell's pledge to keep fighting inflation, Chinese equities and currency tumbled

The slump came amid a global pull back in equities after U.S. Federal Reserve Chairman Jerome Powell warned that inflation remains above the Fed’s long-run goal and supply chain issues may be more persistent than previously thought. “The recent performance of overseas markets is a factor weighing on the A-share markets,” said Zhang Yangbing, an analyst at Zheshang Securities. “Moreover, investors are worried there may be more corrections in overseas markets when mainland markets are closed during the holiday.”

On Thursday, Chinese stocks plunged to nearly 16-month lows, and the yuan weakened against the dollar, as global investors feared the US Federal Reserve would act aggressively to limit inflation. In morning trade, China’s CSI 300 blue-chip share index sank 1.64 percent to its lowest level since September 30, 2020, while the Shanghai Composite index fell 1.47 percent. At lunchtime, both stocks had pared their losses, with the CSI300 down 0.99 percent and the Shanghai Composite down 0.88 percent. Tech stocks took the brunt of the losses, with the CSI Info Tech index down 2.60 percent and an index tracking the computer industry down 3.35 percent Energy shares were a rare standout, with the sector gaining 1.23% after global oil prices reached October 2014 highs. In Hong Kong, the Hang Seng index tumbled 2.57% and the China Enterprises Index was 3.01% lower, set for its biggest daily percentage drop s ince Sept. 20.

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Mainland Chinese markets will be shut for China’s week-long Lunar New Year holiday, which starts Jan. 31. Foreign investors were heavy sellers of Chinese shares on Thursday, with Refinitiv data showing outflows through the northbound leg of China’s Stock Connect programme nearing 8 billion yuan. Data from East Money Information showed outflows at the midday break were already the largest since July 26, 2021. China’s currency also weakened sharply, heading for its biggest one-day loss against the dollar in seven weeks as higher U.S. yields lifted the greenback .

“The key takeaway is that the rate hike cycle is about to start,” Philip Wee, Senior FX Strategist at DBS Group wrote. The market, which had turned neutral ahead of Fed meeting, is now bracing for a more aggressive frontloading of rate hikes, he added. Federal funds futures now price in as many as five rate hikes this year. The yuan fell roughly 0.4% against the dollar, after the People’s Bank of China set a sharply weaker midpoint rate at 6.3382 yuan per dollar, versus 6.3246 a day earlier. It was the biggest weakening in the the daily mid-rate fixed by the central bank sinc e Dec. 20.

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