China’s Stocks, Bonds, Yuan Slump in Unison on Liquidity Concern

  • Shanghai Composite Index retreats most in six months
  • One-year sovereign debt yield increases 15 basis points

Magnus: It's Not Obvious What Trump Wants on China

Unease is once again permeating China’s financial markets.

The Shanghai Composite Index sank 2.5 percent at the close, the yuan fell toward an eight-year low, while government bonds tumbled, with the one-year sovereign yield rising 15 basis points. Analysts had a long list of reasons for the synchronized selloff, from President-elect Donald Trump’s questioning of the decades-old One China policy, to a regulatory crackdown to insurers’ stock investments, higher money market rates and concern that property prices are poised to fall.

The losses are a reminder of the turmoil that dogged China’s financial markets at the start of the year, which gave way to relative calm throughout much of 2016 even as the yuan tracked lower. A resumption in headline-grabbing losses would pose a challenge to the government’s attempts to cut corporate leverage, whether in equities or property, while also risking fueling faster capital outflows as the dollar surges. The unpredictable nature of Trump’s comments on trade policy only adds to the uncertainty.

The decline in stocks was the "result of amplified impact on market sentiment after the cumulative events of higher government bond yields, a weaker yuan against the dollar and regulatory curbs on insurance funds," said Chen Li, a strategist at Credit Suisse Group AG in Hong Kong.

After China’s botched introduction of circuit breakers and a series of weaker currency fixings roiled global financial markets in January, the Communist Party took steps to reduce volatility and restore investor faith. While such measures were successful earlier in the year, this month has seen marked deterioration in the stock and bond markets. Citic Securities Co., the nation’s largest brokerage, said last week it was more worried about the money market now than during the 2013 cash crunch, given accelerating fund outflows.

The Shanghai Composite’s decline Monday was the biggest in six months, while the ChiNext gauge of smaller companies traded in Shenzhen sank 5.5 percent. The 10-year sovereign bond yield rose 9 basis points to a one-year high of 3.19 percent, and the yuan fell 0.1 percent to 6.91 per dollar.

One China

Trump’s stance toward China is pressuring the currency and prompting policy makers to keep borrowing costs elevated, according to Ken Peng, Asia investment strategist at Citigroup Global Markets Asia Ltd. in Hong Kong.

Trump said his support for the decades-old One-China policy will hinge on cutting a better deal on trade and that other nations, especially China, shouldn’t be deciding whom he talks to. “I don’t want China dictating to me,” he said in an interview with “Fox News Sunday," echoing his comment a week ago on Twitter, days after he broke with decades of protocol and spoke by phone with Taiwan’s president.

"As Trump’s comments raise the risk of a trade conflict between the U.S. and China, the yuan probably will continue to face pressure," Peng said. "Thus domestic liquidity may stay tight, which is negative for stocks."

Credit Suisse’s Chen also noted the liquidity concern, saying he’s not sure if the strain is due to seasonal factors or government policy. He said he expects the stock decline to continue for about a week.

Equities also slumped as officials move to rein in financial risks associated with a surge in dealmaking by insurers, after the nation’s top securities official likened leveraged stock buyers to “robbers.”

Insurer Buyouts

Gree Electric Appliances Inc. plunged 6.1 percent in Shenzhen after Foresea Life Insurance Co. said it won’t increase its holdings in the company and will gradually sell the shares. China Vanke Co. tumbled 6.3 percent after the insurance regulator suspended Evergrande Life Insurance Co.’s entrusted stock investment. Foresea Life and Evergrande Life have been battling for control at Vanke, the most high-profile target of a buying spree by Chinese insurers since 2014, helping fuel a 45 percent gain in the developer’s shares in August alone.

"The goverment’s move to tighten insurance firms’ leveraged buying is very worrying as that may discourage their future investments and trigger funds to withdraw from the equity market," said Paul Pong, Hong Kong-based managing director at Pegasus Fund Managers Ltd.

Concern the bubbly housing market is on the brink of a downturn is adding to investor jitters. Construction companies were among the biggest losers on Monday after Vanke’s president predicted home sales will drop “significantly” in the coming year. China City Construction Holding Group, a troubled Beijing-based builder, missed a bond payment due Friday, while there are a record $17.3 billion of developer bonds due next year.

The plunge in Shenzhen-listed stocks comes a week after the city opened its market to the world via an exchange link with Hong Kong. Lackluster demand is removing another key prop for the city’s shares, which rallied in the run up to the start of the link.

"The Shenzhen-Hong Kong connect turnover hasn’t been high,” which may be disappointing the market," said Sam Chi Yung, senior strategist at South China Financial Holdings Ltd. in Hong Kong. "Liquidity is tighter in China as we’re approaching the year-end, and people may need to sell their investments."

— With assistance by Amanda Wang, Emma Dai, and Jeanny Yu

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