October 4, 2023

Everywhere you look in China are signs of more market woes

(Bloomberg) — Things are going from bad to worse for Chinese stocks, with a major index tumbling into a bear market as disappointing manufacturing numbers exacerbate the gloomy outlook.

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A measure of Chinese stocks in Hong Kong fell more than 20% from its recent peak to enter a bear market, while the Hang Seng index also pulled back. The offshore yuan plummeted to a six-month low as commodities from copper to iron ore collapsed.

Global funds are in a hurry to retreat as a slew of disappointing data, geopolitical risks and continued weakness in the real estate sector hurt sentiment. Calls for more policy support are mounting, with concerns about a faltering Chinese economy being felt far beyond the country’s borders.

“The weakness has been expected for months, so the data is just another reason for the market to slow down,” said Yang Zhiyong, executive director of Beijing Gemchart Asset Management Co. “There were a lot of commitments to support the economy earlier this year, but nothing has come of it, and that is the most frustrating thing for me.”

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The Hang Seng Index, Hong Kong’s benchmark, headed into bear market territory before pulling back, while the Hang Seng China Enterprises Index fell 1.9%. Both indicators posted their biggest monthly declines since February, losing more than 8%.

Pessimism is omnipresent. Only 16% of HSCEI members traded above their average stock price in the past 50 days, compared to 58% in mid-April. The Hang Seng index was the worst performing primary indicator on Wednesday.

The onshore CSI 300 Index, which wiped out all of its 2023 gains a few days earlier, fell another 1% on Wednesday.

The stock’s decline may have surprised some traders, who had already anticipated further weakness given the recent string of bad data.

“The data will certainly have a negative impact on the market, but this is not entirely surprising and the market has already priced in some of the weakness,” said Yan Kaiwen, an analyst with China Fortune Securities. “But space for one more slide will be limited.”

Global funds are not waiting to know for sure. They became net sellers of Chinese equities for the second month in a row, something not seen since the defeat in October. Some Chinese bulls, including Citigroup Inc. and Jefferies Financial Group Inc., began to pull back, reducing portfolio allocations.

Foreign investors sold 3.8 billion yuan ($535 million) worth of mainland stock through trade links with Hong Kong on Wednesday.

“The reopening of trade is over and now you can really feel the divergence,” said Patrick Wu, co-head of trade for Asia Pacific and the Middle East at Credit Agricole CIB. “Global traders will now not go to the country to buy assets en masse.”

In addition, a depreciating Chinese currency offers investors another excuse to head for the exit. The offshore yuan fell to a six-month low of 7.1285 per dollar on Wednesday. The yield on 10-year Chinese government bonds fell by a basis point to 2.71%.

Bad data

With estimates from the official manufacturing purchasing managers’ index missing, traders sold industrial metals. Copper extended its worst monthly loss in nearly a year and iron ore fell further below $100 a ton.

Even before Wednesday’s data, economists had called on China’s central bank to cut reserve requirements for major banks before the end of the third quarter.

To make matters worse, there are no signs of a thaw in tensions between Washington and Beijing. The US accused China of an “unnecessarily aggressive maneuver” after a Chinese fighter jet swerved into a US reconnaissance aircraft over the South China Sea. Beijing also recently refused a request from Washington to meet with the countries’ defense chiefs this week.

“China’s uneven economic recovery is one of the concerns of investors, along with geopolitics,” said Vey-Sern Ling, general manager of Union Bancaire Privee. “More government stimulus could help, but evidence of longer-term sustainable growth is needed to allay investor doubts.”

–With help from Tian Chen, Jeanny Yu, April Ma and Tania Chen.

(Updates with closing prices)

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