Global investors are losing faith in China’s ability to navigate an increasingly complex maze of challenges.

The war in Ukraine raises the specter of harsh sanctions being applied to Chinese firms should they proceed with plans to acquire stakes in Russian energy and materials producers. The risk of Chinese companies being delisted from the U.S. is growing. A housing slump is worsening. Record commodities prices locally may stoke inflation, while the highest COVID-19 infections since the Wuhan outbreak will weigh on already weak consumption.

President Xi Jinping’s crackdowns on the most profitable companies had already undermined investor sentiment before Russia’s war. Since the invasion, pessimism has turned into panic. A gauge of Chinese shares in Hong Kong has plunged 15% in the world’s worst performance among actively traded benchmarks. The yield on the nation’s junk bonds has climbed above 25% for the first time. Sovereign debt hasn’t been immune to the selling, with the 10-year yield rising to the highest since December.

While sanctions have weighed more heavily on Russian assets, China’s markets are the ones that matter globally. Russia’s stock market was valued at $781 billion at the start of the year, compared with a combined $19 trillion for mainland China and Hong Kong bourses. Chinese firms account for almost a third of the widely followed MSCI Emerging Markets index, vs. less than 4% for Russia before the index compiler reclassifed the country. China’s onshore debt market is worth about $21 trillion.

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