Mobius Praises China Crackdown as Bulls Swallow Market PainBloomberg News
Tighter regulations spur volatile trading in Shanghai stocks
President Xi stresses importance of controlling leverage
China’s escalating campaign to clean up its financial system is winning plaudits from some of the world’s biggest investors.
Templeton Emerging Markets Group and Fidelity International are among money managers who’ve endorsed a raft of measures from Chinese regulators over the past month to curb leverage, boost transparency and prevent excessive speculation. The investors called on authorities to stick with their campaign even after it sent local stocks to a three-month low and roiled domestic bond markets.
Proponents of the clampdown say short-term market turbulence is a small price to pay for reducing the risk of a major financial blowup in Asia’s largest economy. In one sign that the reform drive has further to run, President Xi Jinping gave it a stamp of approval by presiding over a rare meeting with top financial regulators this week. His participation was featured prominently across state media on Wednesday.
“We welcome such a move and believe this to be overdue,” said Mark Mobius, the executive chairman of Templeton Emerging Markets Group, who’s been investing in developing nations for more than four decades. “If they are determined to remove systemic risk, this may only just be the beginning.”
Tightening the screws on a financial system flush with unprecedented levels of debt is fraught with risk. But Chinese leaders may feel the time is right to act after an uptick in economic growth over the past two quarters and an easing of trade tensions with the administration of U.S. President Donald Trump.
China “should not ignore any single risk, should not let any latent danger go, close the window and the door before the rain starts, and prevent any troubles before they even appear,” an unidentified commentator wrote in an opinion piece in the official Xinhua News Agency on Wednesday. “Once the financial market is detached from the orbit of the real economy, it will become a river with no source and wood with no roots, and it will lead to higher risks and serious consequences.”
Still, authorities’ may have a limited threshold for short-term market pain. Stability has been the watchword for Chinese policy makers before a key leadership reshuffle at the 19th Communist Party Congress later this year. The nation’s central bank will likely step in to contain market turbulence as leveraged institutions pull back, Mobius said. The People’s Bank of China has injected a net 70 billion yuan ($10.2 billion) into the financial system via open market operations this week through Thursday.
“China is making a serious effort to deal with excess leverage,” said Gene Frieda, a London-based global strategist at Pacific Investment Management Co., which oversees about $1.5 trillion. “But the litmus test to determine whether it is serious enough will be in how it reacts to slowing growth -- the inevitable consequence of deleveraging.”
Frieda said the regulatory clampdown has made Pimco more cautious on China-sensitive commodity assets, while Mobius said he’s avoiding the nation’s smaller banks. Both investors said losses in Chinese markets are unlikely to spark global contagion, in part because of the country’s capital controls.
The shakeout may even create buying opportunities, according to Fidelity International.
“If we see the market go down further, it could be an attractive level to buy,” Catherine Yeung, an investment director at Fidelity International, which oversees $279 billion, said in an emailed note. “The measures will not change the fundamentals of the companies we like nor the broader economic landscape.”
The Shanghai Composite Index slumped as much as 1.4 percent before swinging to a gain of 0.4 percent at close on Thursday, as markets reacted to news of the Xi meeting for the first time. The Chinese president chaired a gathering to discuss “safeguarding national financial-market security” on April 25, a day after the worst losses this year in Chinese shares. Xi stressed the importance of maintaining “financial security” and controlling leverage, according to a separate article published by Xinhua.
The meeting was attended by members of the 25-person politburo, made up of the top politicians in China, and details of the gathering were broadcast during the most important time slots on the evening TV and radio news shows produced by state-run media.
“The ‘big show’ for regulators is far from ending,” Guotai Junan Securities Co. analysts led by Tan Han wrote in a note on Thursday.
— With assistance by Tian Chen, and Jing Zhao