Covid lockdown costs Shanghai its Chinese currency trading krone

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(Bloomberg) – The fallout from China’s Covid Zero policy is beginning to reverberate through Shanghai’s financial markets, with the city losing its title as a major currency trading hub for the first time.

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Shanghai handled fewer currency transactions than Beijing in April, to rank second among China’s 36 provinces and municipalities, according to the State Administration of Foreign Exchange. The decline points to another consequence of strict lockdowns and can serve as a case study for the possible implications of movement restrictions in major Chinese cities, including Beijing, as Covid cases rise.

Traders who volunteered to stay in the office, sleeping on the trading floors, did little to sustain currency volumes. Settlements and sales by banks for their customers fell 30% from March to $61.8 billion. This represents 15% of the national tally, compared to a flat share of around 20% before the lockdown, according to data dating back to 2019.

The data accurately reflects that the shutdowns have had a profound impact on economic activities, said Peiqian Liu, chief China economist at NatWest Group Plc. “Traditional business hedging, buying and selling of currencies were affected, although financial services were able to continue to operate as normal to a large extent,” she said.

Prolonged Covid restrictions have hurt China’s economic outlook and prompted banks including UBS Group AG and Goldman Sachs Group Inc to cut their growth forecasts for this year. The impact on Shanghai’s economy has been disastrous. Not a single car was sold in the city last month and its industrial output plunged more than 20 times faster than the rest of the country. Shanghai’s April industrial export shipments fell 57% year-on-year.

Despite the easing of the borders, Shanghai is not yet completely out of the woods. Its vice mayor said last week that the city aims to return to normal life and restore full production at the plant by mid-June.

bad timing

The disruption in currency trading could not have come at a worse time. Last month, the onshore yuan posted its biggest monthly loss since China unified its foreign exchange market in 1994, on concerns over a Covid-stricken economy accelerating outflows from the country’s financial markets and a widening gap in the monetary policy with the United States has dampened foreign appetite for Chinese debt.

Some banks in Shanghai and Beijing were understaffed due to the Covid situation and were unable to provide new quotes on time last month when demand for FX settlement spiked due to the sharp depreciation of the yuan. , Zhong Chuan Finance Co. Ltd, a financial unit of state-owned China State Shipbuilding Corporation, said in a post on its official WeChat account.

The average daily volume of spot trading between the dollar and the yuan in the onshore market fell to around $26 billion in April, from $31 billion in the first three months of the year, according to Bloomberg calculations. based on data from the Chinese exchange system. It was even as authorities investigated the exchange crisis and waived currency trading fees for small businesses.

The decline in activity may not bode well for the city as it aims to increase the total value of financial transactions to around 2.8 trillion yuan ($419 trillion) per year by 2025. as part of its plan to become a global financial center. “The recovery in Shanghai will be gradual and financial activities will still be subject to varying degrees of lockdown,” said Liu of NatWests.

(Updates with April export delivery data in the fifth paragraph)

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