Across China, there are signs of even more market misery

(Bloomberg) – Things are getting worse for Chinese stocks. A major index is slipping into a bear market as disappointing manufacturing data adds to the bleak outlook.

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An indicator for Chinese stocks in Hong Kong fell over 20% from its recent high and entered a bear market, while the Hang Seng Index also declined. The offshore yuan fell to a six-month low as commodities ranging from copper to iron ore tumbled.

Global funds are in a precipitous retreat as a string of disappointing data, geopolitical risks and continued weakness in the real estate sector weighed on sentiment. Calls for more political support are mounting, and concerns about a faltering Chinese economy are being felt well beyond China's borders.

“The weakness has been anticipated for months, so the data is just another reason the market is faltering,” said Yang Zhiyong, general manager of Beijing Gemchart Asset Management Co. “There have been many pledges to support the economy.” I did it earlier this year, but none of that comes to fruition, which is what frustrates me the most.”

Misery May dashed hopes of a recovery in Chinese equities

Hong Kong's benchmark Hang Seng Index headed for a bear market before falling, while the Hang Seng China Enterprises Index fell 1.9%. Both indicators posted their largest monthly declines since February, falling more than 8%.

Pessimism is omnipresent. Just 16% of HSCEI members have traded above their average share price over the past 50 days, compared to 58% in mid-April. The Hang Seng Index was the main worst-performing indicator on Wednesday.

The onshore CSI 300 index, which just days earlier erased all of its gains for 2023, fell another 1% on Wednesday.

The drop in shares may have surprised some traders who were anticipating further weakness given the recent bad data.

“The data will certainly have some negative impact on the market, but that's not entirely surprising and the market has already discounted some of the weakness,” said Yan Kaiwen, an analyst at China Fortune Securities. “But the scope for another slide will be limited.”

Global funds don't wait to find out for sure. They became net sellers of Chinese stocks for the second month in a row, not since the October bust. Some Chinese bulls, including Citigroup Inc. and Jefferies Financial Group Inc., have started to retreat and reduce portfolio allocations.

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

“The reopening of trading is over and now you can really feel the divergence,” said Patrick Wu, co-head of trading for Asia Pacific and the Middle East at Credit Agricole CIB. “Global traders will no longer go abroad to buy assets on a large scale.”

In addition, the devaluation of the Chinese currency provides investors with another excuse to exit. The offshore yuan fell to a six-month low of 7.1285 per dollar on Wednesday. The Chinese 10-year government bond yield fell one basis point to 2.71%.

bad data

As the official manufacturing PMI lacked estimates, traders sold base metals. Copper extended its worst monthly loss in nearly a year and iron ore fell further below $100 a ton.

Even before the data was released on Wednesday, economists had called for the Chinese central bank to cut the reserve ratio for major banks before the end of the third quarter.

To make matters worse, there are no signs of thawing tensions between Washington and Beijing. The United States accused China of “unnecessarily aggressive maneuvers” after a Chinese fighter jet swerved in front of a US reconnaissance plane over the South China Sea. Beijing also recently turned down a request from Washington to meet with countries' defense chiefs this week.

“China's uneven economic recovery is one of investors' concerns, along with geopolitics,” said Vey-Sern Ling, managing director at Union Bancaire Privee. “Further government stimulus could help, but evidence of sustained longer-term growth is needed to put investors' doubts to rest.”

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

(updates with closing prices)

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