Falling Chinese markets lead to capital flight and state support

(Bloomberg) — It has been a painful week for Chinese stock, bond and currency traders as mounting concerns about the fallout from the country’s Covid Zero strategy sent markets tumbling.

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The Hang Seng China Enterprises Index of major mainland companies listed in Hong Kong is among the worst performing stock indices globally this week. The yuan is on track for its biggest drop in five days in nearly three years. High-yield dollar bonds are headed for their longest streak of weekly losses since March.

Sentiment over Chinese assets soured as the Covid shutdowns slowed economic growth and stimulus policies did not meet investor expectations. Local stocks have lost about $2.7 trillion in market value this year, prompting authorities to step up efforts to stem the decline.

“For sentiment to turn around, we need to see something honest from policy makers, either a lot of excess liquidity, a big turnaround in Shanghai’s situation, or a massive surprise that will inspire some new hope in the market,” said Wang Yugang. , a fund manager at Beijing Ax Asset Management Co., Ltd.

The Hang Seng China corporate index is down 5.6% this week, the biggest drop in more than a month. Other assets are also under pressure, with the local yuan heading for its biggest weekly loss since August 2019. Options traders anticipate additional price weakness for the currency after it broke through a key technical support level on Wednesday for the first time since September.

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Khun Goh, Head of Asia Research at Australia & New Zealand Banking Group Ltd. “It seems that allowing the yuan to weaken a bit this week is part of the overall support package.”

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Meanwhile, junk dollar bonds fell for the second week in a row in the worst such stretch since mid-March. That equates to an initial bounce that securities have had on Beijing’s promises of support, as investors are impatient for more details.

In a sign of broader concerns, top-rated developers such as Country Garden Holdings posted some of the biggest drops this week. Any renewed recovery in the future may only continue if concrete and important policy steps are taken quickly, according to Jean-Louis Nakamura, chief investment officer for Asia Pacific at Lombard Odier.

Seek support

The authorities are taking measures to stem the declines. At a meeting Thursday with investors, the securities regulator called on the country’s giant Social Security Fund, banks and insurance companies to boost their equity investments.

This was followed by a series of articles in state media showing confidence in the economy and markets. The concerted effort underscores mounting pressure on the authorities to boost confidence ahead of a closely watched leadership meeting expected to confirm an unprecedented third term for Chinese President Xi Jinping.

This is not the first time the government has urged institutional investors to increase positions. A similar call was issued less than two weeks ago after a request made in October 2019.

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With no end to tight Covid restrictions in sight, foreign investors dumped 45 billion yuan ($7 billion) of shares in March, the largest outflow in nearly two years, while global funds reduced their holdings of Chinese bonds by the largest amount ever. in that month.

The authorities have shown little concern about the withdrawals, with Fang Xinghai, vice-chairman of the China Securities Regulatory Commission, saying on Thursday that capital outflows will always return.

“Beijing clearly wants to stop the downward trend on the economy and the stock market,” said Castor Pang, head of research at Core Pacific Yamaichi. But the economy is like a giant ship, and it takes time to turn around. Even if Beijing wants to talk about the market, it’s hard to change the way investors think.”

pension payment

Separately, China also published guidelines on the development of individual pensions on Thursday, which CICC analysts estimate a total of 1 trillion yuan long-term value. This may help fuel additional inflows into domestic stocks.

Meanwhile, authorities are trying to resolve a dispute over the audit of Chinese companies listed in the US, an issue that has weighed on sentiment. The regulator’s Fang said Thursday that the securities regulator is in talks with the US Public Accounting Oversight Board every two weeks and is “confident” of an audit deal.

The Hang Seng Tech Index closed 0.3% higher after sliding as much as 3.6% earlier. The mainland benchmark CSI 300 finished the session 0.4% higher, reversing a 1.1% loss. The gauge fell 4.2% this week to mark its worst performance in five days since mid-March.

However, the path may be just what is needed to lure investors back in. Funds were on the sidelines as the market waited to form a “double bottom,” a sign that it might be safe to rebuild positions.

(updates throughout)

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