China Takes Sell in May to Extreme as Yuan, Stocks, Bonds Drop

Yuan's Recent Fall Fails to Trigger Panic, Here's Why

Chinese investors have taken the sell in May and go away maxim to heart.

The nation’s currency, stocks and bonds have all fallen for a second straight month -- the first time that’s happened since at least 2006, according to data compiled by Bloomberg. The yuan is heading for its biggest monthly loss since last year’s devaluation with a 1.6 percent decline, while the Shanghai Composite Index fell 0.7 percent even after rallying on Tuesday. Government bonds are slumping the most in 12 months, with the 10-year sovereign yield rising nine basis points.

Investors turned more bearish as April economic data trailed estimates and a high-profile warning about China’s debt burden by the People’s Daily, the Communist Party’s mouthpiece, damped hopes for more easing. With little sign of the panic that gripped the nation’s markets earlier in the year, traders are now shifting attention to next month’s key events -- the Federal Reserve meeting and MSCI Inc.’s decision whether to include the nation’s equities in global benchmark indexes.

"The market’s expectations are that the rebound in the economy isn’t likely to continue and the government won’t implement massive stimulus," said Dai Ming, a fund manager at Hengsheng Asset Management Co. in Shanghai. "Things are not likely to improve immediately in June, so there isn’t much room for upside."

The yuan fell 0.05 percent to 6.5851 a dollar as of 3:35 p.m. in Shanghai, within 0.2 percent of its five-year low reached in January. The end of a temporary sweet spot that China enjoyed with its exchange rate -- strength versus the dollar and weakness against trading partners -- will spur renewed capital outflows, Goldman Sachs/Gao Hua Securities Co. said last week.

“Various signals sent by the policy makers indicate that there will be no more massive easing,” said Xu Yuehong, an analyst at Bank of Communications Co. in Shanghai. “This is adding pressure to the market, as the pending U.S. interest-rate decision continues to be the major external risk that will directly affect the currency, which in turn could bring tightening pressure to onshore liquidity.”

A gauge of the greenback’s strength is near a 10-week high. Investors are now predicting a 30 percent chance the Fed will raise interest rates at its next meeting, up from 12 percent at the start of the month.

The Shanghai Composite fell for a second straight month. While the gauge climbed 3.3 percent on Tuesday after Goldman Sachs Group Inc. increased its odds for MSCI inclusion to 70 percent from a 50 percent prediction given in April, trading in the measure has otherwise been subdued in May and bearish bets have been increasing.

Short interest in the CSOP FTSE China A50 ETF climbed to 6.1 percent on May 25, the highest level since April 2015, two months before Chinese equities peaked, and up from 1.3 percent at the end of last month.

"Some macro funds are seeking opportunities to short index futures to play the currency movement," said Wenjie Lu, Shanghai-based strategist at UBS Group AG. "A higher chance of a Fed rate hike means there’s pressure for the yuan to soften."

— With assistance by Shidong Zhang

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