China Bond Selloff Spreads to Stocks as Deleveraging Risks Mount

Updated on
  • ChiNext leads fall as bond yields rise near a three-year high
  • There’s concern economic data in October will weaken: KGI

China Early Data Shows Markets Upbeat vs Real Economy

Chinese stocks fell the most since early August, breaking the calm that persisted through the recent Communist Party Congress, as sovereign bonds extended a monthly rout amid concern the government will step up efforts to reduce leverage in the financial sector.

The Shanghai Composite Index dropped as much as 1.7 percent on Monday, and closed 0.8 percent lower. Small-cap shares bore the brunt of the selling, with the ChiNext gauge tumbling as much as 2.5 percent. Equity indexes in Hong Kong reversed gains. The 10-year yield climbed 8 basis points to 3.93 percent, near a three-year high.

While China’s equity market was subdued for most of this month amid state efforts to limit volatility during the twice-a-decade Party gathering, sovereign yields have been climbing. There’s more than 1 trillion yuan ($150 billion) of funding provided by the central bank that matures this week, the most since February.

"Pessimism in the bond market is spilling over to the stocks," said Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong. "Surging yields of the government bonds are resulting in worsened sentiment and higher funding costs for companies, of which smaller ones will suffer most as they rely more heavily on the market rather than bank loans for financing."

There are also early signs economic data may weaken, after solid figures for most of this year buoyed equities. Chinese shares held steady during the week-long Congress amid speculation the “National Team,” as state-backed funds are referred to, would step in to avoid any large swings.

“Previously the market was stable because the National Team was there during the Party congress,” said Ken Chen, an analyst at KGI Securities Co. “Now the meeting is over, and October’s economic data are expected to be worse than September’s, which worries investors.”

  • The CSI 300 Index’s consumer staples subgauge retreated 1.9% after rising to an unprecedented high on Friday. Kweichow Moutai Co., which also rose to a record on Friday, fell 4.2%
  • Chinese brokerages declined, with China Galaxy Securities Co. losing 5.5% and China Merchant Securities Co. dropping 4.9% in Shanghai
  • Apple Inc.’s suppliers including AAC Technologies Holdings Inc. advanced amid signs of strong demand for the U.S. giant’s latest iPhone
  • CRRC Corp. closed at its highest level since April 5 after an upgrade by JPMorgan Chase & Co. and earnings release on Friday
  • The yuan added 0.08 percent to 6.6460 per dollar. Volatility in the currency in the past 10 days is the lowest since Aug. 8

— With assistance by Justina Lee, Tian Chen, Cindy Wang, and Emma Dai

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