Chinese Stocks Slump as Cash Injection Fails to Lift Markets

China Chaos: What Would Stabilize the Markets?
  • Higher borrowing costs, currency volatility weigh on stocks
  • Three-month Hibor in Hong Kong jumps to highest since 2009

Chinese stocks tumbled as the central bank’s biggest cash injection in the financial system in three years failed to ease concern that the nation’s economic slowdown will deepen.

The Shanghai Composite Index slid 3.2 percent to 2,880.48 at the close. Hong Kong’s Hang Seng China Enterprises dropped 2.2 percent to the lowest level since March 2009. Hong Kong stocks fell below the value of their net assets for the first time since 1998. Property developers led declines on concern higher borrowing costs will crimp earnings after the three-month Hong Kong Inter-Bank Offered Rate climbed to the highest level in more than six years.

China cranked up cash injections in its money-market operations after a gauge of interbank funding availability in the mainland jumped the most in 13 months on Wednesday. The government is trying to hold borrowing costs down to support its economy without spurring an exodus of funds that drove the yuan to a five-year low this month. The People’s Bank of China said Thursday it conducted 110 billion yuan ($16.7 billion) of seven-day reverse-repurchase agreements and 290 billion yuan of 28-day contracts.

“The PBOC’s largest cash injection in three years is just part of the liquidity management in China where they are shifting towards shorter-term tweaking as compared to longer-term management tools,” said Bernard Aw, a strategist at IG Asia Pte. in Singapore. “But it does suggest that capital outflow is still a huge problem.”

Rate Outlook

China is moving away from traditional monetary easing measures such as cuts in interest rates and lenders’ requirement ratios, according to Aw. The People’s Bank of China is substituting new tools to step up cash injections with open-market operations instead of cutting reserve ratios, Ma Jun, chief economist at the monetary authority’s research bureau, said in an interview Wednesday with China Central Television.

Speculation that the government would add to six rate cuts since the end of 2014 fueled a 3.2 percent jump for the Shanghai index on Tuesday after the release of weak economic data. China’s economic growth missed analysts’ estimates last quarter, while industrial production, retail sales and fixed-asset investment all slowed at the end of last year.

The Shanghai Composite and Hang Seng China indexes have both fallen 19 percent this year, making them the worst-performing global benchmark measures out of the 93 tracked by Bloomberg. The large-cap CSI 300 Index entered a bear market on Thursday. sliding 20 percent from the December low. The Shanghai gauge has been in a bear market since last Friday.

"We believe that this is a temporary correction and therefore weakness should
be purchased," Stephen Corry, chief investment strategist at LGT Bank in
Hong Kong, said at a media briefing on Thursday. "Chinese equities, and particularly the H shares, are priced for an economic recession that I do not expect to occur."

Besides yuan volatility and the growth slowdown, investors are also concerned about capital outflows, said Li Jingyuan, general manager at Shanghai Bingsheng Asset Management.

More than $840 billion exited the country in the first 11 months of last year in an unprecedented exodus, according to a Bloomberg gauge. This concern may be spurring the government to take new measures. Some Shanghai banks have asked their branches to strictly control the sale of foreign exchange to individuals, according to people familiar with the matter, as regulators vowed to step up monitoring of illegal currency transactions.

More Selling

The CSI 300 slid 2.9 percent on Thursday, led by industrial and consumer-discretionary companies, as nine out of the 10 industry groups lost at least 2.3 percent. China Communications Construction Co. plunged 7.8 percent, while Suning Commerce Group Co. tumbled 4.9 percent.

Hong Kong’s Hang Seng Index fell 1.8 percent, sending its price-to-book ratio below one. The last time the gauge traded below that level, the Asian financial crisis was roiling the region’s markets and bursting a property bubble in the city. A gauge of developers slid 3.3 percent for the steepest loss among the groups. Henderson Land Development plunged 6.1 percent, while Cheung Kong Property Holdings Ltd. fell 4.8 percent, extending losses to 12 percent over the past two days.

Hong Kong’s interbank borrowing costs climbed above U.S. dollar rates for the first time in two months as capital outflows from the city accelerated. The city’s dollar reversed gains and traded within 0.1 percent off its lowest level in more than eight years as risk-off sentiment crept back into Asia.

“H shares retreated fast as Hibor continued to spike,” said Clement Cheng, a trader at RBC Investment Management in Hong Kong. The three-month Hibor in Hong Kong climbed to 0.63 percent, the highest level since May 2009.

Chinese stocks in Hong Kong are poised for a fresh wave of selling, according to Bank of America Corp. The H-shares gauge is approaching a level that forces investment banks to pare back their bullish futures positions, said William Chan, the head of Asia Pacific equity derivatives research at BofA’s Merrill Lynch unit in Hong Kong.

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