The worst isn’t over for Chinese stocks after the biggest three-day rout since June 2013, according to HSBC Global Asset Management.
China’s government will probably take further steps to curb the use of borrowed money for share investment after margin debt rose to a record, said Mandy Chan, whose $111 million HSBC China A-Share Fund topped 90 percent of peers tracked by Bloomberg in the past year with a 96 percent gain. Mid- and small-capitalization stocks are most vulnerable to declines, she said.
“Shares are experiencing a healthy correction and they may have more corrections to come amid policy risk,” Chan said in a Thursday interview in Taipei, adding she’s still bullish on yuan-denominated shares over the longer term. “They have risen a bit fast and the government may talk down margin activity.”
The benchmark Shanghai Composite Index is on track for the biggest weekly retreat since July 2010, paring its world-beating surge over the past 12 months to 107 percent. The China Securities Regulatory Commission has already banned some forms of financing for margin trades and China Business News reported Thursday that a state-backed lender to brokerages is advocating for further controls.
The outstanding balance of margin debt on the Shanghai Stock Exchange increased to a record 1.27 trillion yuan ($205 billion) on Thursday, while the number of Chinese stock accounts containing funds rose to an unprecedented 63.7 million in the week ended May 1.
Chan has sold some Chinese financial companies and property developers after share prices surged, she said. She shifted the proceeds into food and beverage stocks, declining to name any specific companies.
The CSI 300 Financials Index has rallied 116 percent over the past year, while the consumer-staples gauge rose 61 percent for the second-worst performance among 10 industry groups.
While China’s official Xinhua News Agency said Tuesday that the stock-market rally has further to go and shares rose Friday on stimulus speculation, Chan’s caution has been echoed by a growing number of forecasters.
Jonathan Garner, the chief Asia and emerging market strategist at Morgan Stanley, downgraded Chinese stocks for the first time in more than seven years on Thursday, citing the weakest corporate profits since 2009. BNP Paribas Investment Partners has sold some Chinese shares listed in Hong Kong on concern about ballooning mainland margin debt.
China’s stocks also face risks from rising valuations and a slowing economy, Chan said. Even after this week’s drop, the Shanghai Composite is valued at 16 times estimated earnings for the next 12 months, a 57 percent premium over the five-year average, according to data compiled by Bloomberg.
Chinese trade data released on Friday showed an unexpected drop in exports and a double-digit decline in imports. Gross domestic product expanded at the slowest quarterly pace in six years in the first quarter, while industrial output missed forecast in March and the HSBC Holdings Plc and Markit Economics’ manufacturing gauge for April signaled a contraction.
“The economy has downside,” Chan said. “The second quarter may be worse than the first quarter.”