China’s zero-Covid policy has put the country’s stocks on track for their steepest monthly loss in six years, as investors and analysts warn of deeper falls to come on concerns that Beijing could miss its growth target for the first time.

Souring sentiment has pushed the country’s CSI 300 stock benchmark down 10 per cent this month, with traders dumping Chinese equities in the face of harsh lockdowns in cities including Shanghai, the country’s largest port and financial centre. With the possibility of a lockdown in Beijing looming, more investors are worrying the worst may lie ahead.

“Global markets have been playing catch-up in recognising the severe consequences of China’s zero-Covid strategy,” said Ting Lu, an analyst at Nomura, which recently slashed its China growth estimate to 3.9 per cent.

China is aiming for annual growth of “about 5.5 per cent” this year. But, with officials struggling to rein in multiple Covid outbreaks, economists have been forced over the past week to slash their predictions to levels once reserved for worst-case scenarios, pushing down the median forecast among financial institutions polled by Bloomberg to just below 5 per cent.

The darkening outlook has prevailed in markets, with stock benchmarks in mainland China and Hong Kong down roughly 5 and 4 per cent this week, respectively. Even leading companies in strategic sectors supported by Beijing have posted double-digit losses this year, with chipmaker SMIC down 29 per cent while CATL, the world’s biggest battery maker for electric vehicles, has fallen 35 per cent.

“This will only get worse before it gets better,” said Andy Maynard, a trader at investment bank China Renaissance. He added that while some hedge funds were closing out bets against Chinese stocks, “at higher levels, there’s massive orders for the shorts to go back on again”.

Analysts said the fact that China even had a growth target to miss this year stemmed from initial confidence among top leaders in their ability to maintain the strict zero-Covid approach, which has been vocally endorsed by President Xi Jinping.

But the target was set before the highly contagious Omicron coronavirus variant took hold in China, resulting in a series of lockdowns along with rising mortality figures owing to a lack of vaccination among vulnerable elderly populations.

Now, as mass testing in Beijing stokes fears of a Shanghai-style lockdown, investors face the prospect that the growth targets that have served as lodestar for the world’s second-largest economy for a quarter-century may no longer be achievable.

Analysts at JPMorgan wrote this week that their latest forecast of 4.6 per cent suggested China could “significantly” undershoot its growth goal “for the first time since an annual target was introduced in the late 1990s”.

They also warned the People’s Bank of China might be holding back from large-scale stimulus on the assumption the targeted easing measures it has deployed would prove sufficient.

“If a policy decision is still based on historical analysis, the risk of policy under-delivery is significant,” they said.

Some institutional investors have maintained a positive outlook, even as expectations deteriorate. On Tuesday, UBS Global Wealth Management said it was lowering earnings growth forecasts for Chinese equities but still viewed them as the best bet in the region.

“While market sentiment is likely to be fragile in the near term, with earnings downgrades capping the performance of Chinese equities, we retain our most preferred rating for China within our Asia portfolios and continue to see areas of value,” said Mark Haefele, chief investment officer for the Swiss lender’s wealth management business.

Yet outflows from China’s stock market suggest global investors are not ready to rush back in, with foreign holdings of onshore equities remaining down by about Rmb26bn ($4bn) for the year to date, despite recent suggestions from local officials that the intensity of Shanghai’s lockdown had peaked.

“China’s Covid caseloads have moderated but overall sentiment has worsened further,” said Lu at Nomura, pointing to recent panic buying at markets in Beijing. “We believe the worst is yet to come.”