Bear market, weak yuan show problems in China are piling up
HONG KONG A deepening sense of unease is rippling through China’s financial markets.
The benchmark Shanghai stock index has tumbled 20 per cent in just five months to enter a bear market. The yuan is heading for its longest losing streak in four years in Hong Kong. Corporate defaults are mounting.
There are homegrown reasons for the concern: The nation’s deleveraging campaign is reducing the amount of liquidity available — threatening growth in the world’s second-largest economy. Then throw in an unpredictable trade war with the U.S., and investors are facing a long list of reasons to sell.
Official efforts to calm nerves, from cutting reserve ratios to publishing upbeat editorials in financial newspapers, have had little effect so far. The Shanghai Composite Index’s failure to hold above 3,000 — long seen as a level that would prompt state intervention — has reduced appetite for bargain hunting. The gauge has been technically oversold for the past six days, the longest stretch since 2013, and losses in the stock market have totalled US$1.8 trillion since January.
“Fundamentals in China are very bad,” said Hao Hong, chief strategist at Bocom International Holdings Co. “Selling pressure in the market is still very big.”
The Shanghai Composite lost 0.5 per cent on Tuesday, led by energy and financial shares. The tech-heavy Shenzhen index had already entered a bear market in February. The MSCI China Index of mostly offshore stocks has fallen 14 per cent from its 2018 high.
The sell-off is a stark reminder of how quickly things can unravel in China — only months ago, it had looked like investors were finally getting a better deal after years of disappointing returns. The Shanghai Composite had its best start to a year since 2009, while back then the currency was surging at its fastest pace since at least 2007.
The fall back to earth looks more like 2015, when the bursting of an equity bubble and surprise currency devaluation roiled global markets and caused international money managers to question the Communist party’s grip on the economy. While officials eventually succeeded in bringing the nation’s markets under control, they’ve sought to tackle the bigger issue of excessive debt, which meant restricting the hidden channels of capital that flow throughout China’s financial system.
“Many onshore investors remain mindful that the authorities still have deleveraging and financial-risk reduction as their long term objective, despite willingness to provide liquidity in the near term,” said Tai Hui, JPMorgan Asset Management’s chief market strategist for Asia Pacific. “Sentiment could remain cautious.”
The Shanghai Composite has tumbled 8.1 per cent this month, poised for its worst performance since January 2016, even as MSCI Inc. added the nation’s shares to its global gauges, while the yuan has dropped 2.4 per cent. Bonds are the standout, with the 10-year yield falling to a two-month low, as investors sought refuge.
Losses accelerated last week after U.S. President Donald Trump threatened duties on US$200 billion in Chinese imports, and another US$200 billion after that if Beijing retaliates.
Other markets have also started to buckle, with U.S. stocks showing signs of weakness on Monday. Redemptions from equity funds globally reached US$13 billion in the week through June 20.
Many of their Chinese counterparts feel the same way. “The market may keep falling since it’s still hard to gauge the impact of trade tensions,” said Qian Qimin, a Shenwan Hongyuan Group Co. strategist in Shanghai. “Investors will keep cutting risk.”