China’s mar­kets con­tinue to suf­fer sharp de­cline

And ‘there’s a lot of pain’ to come


North Amer­i­can stock mar­kets weren’t the only ones to feel the pain this week: China’s main in­dex dipped nearly eight per cent as the coun­try ’s mar­kets con­tinue to en­dure a painful, months-long de­cline not seen since 2014.

Since hit­ting their peaks in Jan­uary, China’s in­dexes have been dec­i­mated. The Shang­hai Com­pos­ite In­dex is down 27 per cent and hit a new low for the year on Thurs­day, while the tech-heavy Shen­zhen Com­pos­ite In­dex has fallen even fur­ther and is down 35 per cent since its peak.

The stun­ning losses have re­sulted in China be­com­ing the owner of the world’s worst eq­ui­ties mar­ket.

“It’s re­ally go­ing to drag out here,” said Stephen Innes, head of train­ing in Asia-Pa­cific for Oanda. “I think there’s a lot of pain in the China trade over the next six months to a year.”

Innes said the Chi­nese mar­kets are volatile and have been at risk as the coun­try moves “away from brick and mor­tar to a more ser­vices and de­mand-driven econ­omy.”

Eighty per cent of the Shang­hai ex­change is dom­i­nated by re­tail and in­di­vid­ual stock traders, Innes said. Their spec­u­la­tive ap­proach, which in­volves heavy doses of short selling, of­ten re­sults in the ex­change op­er­at­ing “like a gam­bling casino,” he said. Even af­ter the rout, in­vestors “are still pil­ing money in” and “re­main un­fazed.”

The pres­ence of other head­winds, such as ris­ing U.S. Trea­sury yields and the on­go­ing trade war with the U.S., is keep­ing it from sta­bi­liz­ing.

Since July, China and the U.S. have been em­broiled in a fight that has seen each coun­try im­pose on the other 25-per-cent tar­iffs on US$50-bil­lion worth of goods. U.S. Pres­i­dent Don­ald Trump con­tin­ued to es­ca­late ten­sions by levy­ing China with a 10-per-cent tar­iff on an ad­di­tional US$200-bil­lion worth of im­ports. With­out con­ces­sions, Trump said he’s de­bat­ing more tar­iffs on US$267-bil­lion worth of Chi­nese im­ports.

Beyond the tar­iffs, China has been ac­cused by the U.S. of be­ing a cur­rency ma­nip­u­la­tor and of techre­lated spy­ing. All it takes is one ill-timed com­ment from Trump to see the mar­kets slump, Innes said.

“He can move from call­ing the feds crazy to say­ing some­thing is ‘loco’ for the U.S. Trea­sury and, boy, we’ll be down here in a heart­beat,” Innes said.

The trade war may also be play­ing a role in the yuan’s steep de­cline. The Chi­nese cur­rency fell this week be­low seven to the U.S. dollar for the first time since the re­ces­sion in 2008. Last week, The Peo­ple’s Bank of China cut banks’ re­serve re­quire­ment ra­tio by 100 points in an ef­fort to help the yuan re­cover and tempt in­vestors into bor­row­ing more. But so far, the cut hasn’t stopped the mar­kets from bleed­ing. Ac­cord­ing to a Mac­quarie note, the cut is “far from enough to turn the econ­omy” around.

On Fri­day, the Shang­hai ex­change ap­peared to slightly re­bound — by less than one per cent.

The gains come on the heels of the Fed an­nounc­ing Thurs­day that it did not con­sider China to be a cur­rency ma­nip­u­la­tor. The sen­ti­ment is still sour on Bei­jing, Innes said, but the tech com­pa­nies may prove to be good op­tions in the mar­ket for in­vestors with longterm mind­sets be­cause many are in over­sold ter­ri­tory.

“The whole Chi­nese e-com­merce sec­tor is as sure of a can’t-miss as you can get in the mar­ket,” he said.

Alejo Cz­er­wonko, emerg­ing mar­ket strate­gist at UBS Global Wealth Man­age­ment’s Chief In­vest­ment Of­fice, also sug­gested in­vestors could ben­e­fit from dip­ping into the Chi­nese mar­ket in the long-term. Ad­di­tional weak­ness in the mar­ket could be seen, Cz­er­wonko said, if the U.S. reaches phase three of its tar­iff im­ple­men­ta­tion — mean­ing nearly all im­ports would be af­fected. Tra­di­tion­ally, how­ever, emerg­ing mar­ket funds have re­bounded af­ter a 20-per-cent drop.

“You’ve never lost money if you bought af­ter the 20-per-cent drop with two, three, four, five or 10 years of in­vest­ment hori­zon,” Cz­er­wonko said. “Buy­ing af­ter a 20-per-cent cor­rec­tion pays off.”


China’s in­dexes have been bat­tered since hit­ting highs in Jan­uary. The coun­try is now the owner of the world’s worst eq­ui­ties mar­ket. The Shang­hai Com­pos­ite In­dex is down 27 per cent, while the Shen­zhen Com­pos­ite In­dex fell fur­ther by 35 per cent since its peak.

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