(Bloomberg) – It’s been a painful week for traders in Chinese equities, bonds and currencies as growing fears over the fallout of the country’s Covid-Zero strategy plunge markets.
Most read by Bloomberg
The Hang Seng China Enterprises Index of large Hong Kong-listed mainland companies is among the world’s worst-performing equity benchmarks this week. The yuan is on course for its steepest five-day decline in nearly three years. High-yield dollar bonds head for longest stretch of weekly losses since March.
Sentiment towards Chinese assets has deteriorated as Covid slows economic growth and policy stimulus falls short of investor expectations. Domestic stocks have lost about $2.7 trillion in market value this year, prompting authorities to step up efforts to halt the decline.
“For sentiment to turn around, we need something genuine from policymakers, either a lot of additional liquidity, a big shift in the situation in Shanghai, or a massive surprise that will bring renewed hope to the market,” said Wang Yugang, fund manager at Beijing Ax Asset Management co
The Hang Seng China Enterprises Index lost 5.6% this week, the biggest drop in more than a month. Other assets are also under pressure, with the onshore yuan on course for its biggest weekly loss since August 2019. Options traders are pricing in further weakness for the currency after it broke a key technical support level for the first time since September on Wednesday.
“The PBOC is looking to continue supporting the economy and seems keen to pull as many levers as possible, perhaps except for rate cuts for now,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. “Letting the yuan weaken slightly this week appears to be part of the overall ‘support package’.”
The story goes on
Meanwhile, junk-dollar bonds fell for the second straight week in their worst stretch since mid-March. That mitigates an initial boost that Beijing’s promise of support gave securities stocks as investors’ patience for more details wanes.
In a sign of broader concern, higher-rated developers like Country Garden Holdings Co. posted some of the week’s biggest declines. According to Jean-Louis Nakamura, chief investment officer for Asia Pacific at Lombard Odier, an imminent rebound can only be sustainable if concrete and significant policy steps are taken quickly.
i am looking for support
Authorities are taking action to curb the declines. At a meeting with investors on Thursday, the securities regulator urged the country’s giant Social Security Fund, banks and insurers to increase their equity investments.
A series of articles in state media followed, projecting confidence in the economy and markets. The concerted effort underscores mounting pressure on authorities to boost confidence ahead of a closely-watched leadership talks expected to confirm a landmark third term for Chinese President Xi Jinping.
This isn’t the first time the government has urged institutional investors to increase their positions. A similar call was made less than two weeks ago, following a request made in October 2019.
With no end in sight to the strict Covid restrictions, foreign investors dumped 45 billion yuan ($7 billion) worth of shares in March, the largest outflow in almost two years, while global funds dumped their holdings in Chinese bonds reduced more this month than ever before.
Authorities have shown little concern over the withdrawals, with Fang Xinghai, vice chairman of China’s Securities Regulatory Commission, saying on Thursday capital outflows will always return.
“Apparently, Beijing wants to contain the bearish sentiment in both the economy and stock markets,” said Castor Pang, research director at Core Pacific Yamaichi. “But the economy is like a huge ship and it takes time to turn around. Even if Beijing wants to hype the market, it’s hard to change the mindset of investors.”
pension increase
Separately, China also released guidelines on Thursday for the development of individual pensions, which CICC analysts estimate will be worth a total of 1 trillion yuan in the long term. This could help spur additional inflows into domestic equities.
Meanwhile, authorities are trying to resolve a dispute over the audit of US-listed Chinese companies, an issue that has weighed on sentiment. The securities regulator holds biweekly meetings with the US Public Company Accounting Oversight Board and is “confident” of completing an audit deal, the regulatory commission’s Fang said Thursday.
The Hang Seng Tech Index was down 0.4% as of 3:34 p.m. in Hong Kong after falling 3.6% earlier. Mainland benchmark CSI 300 Index ended the session up 0.4%, reversing an earlier loss of up to 1.1%. The gauge plunged 4.2% this week, posting its worst five-day performance since mid-March.
Still, the slide could be just what it takes to lure investors back. Funds stood on the sidelines as they waited for the market to form a “double bottom,” a sign that it might be safe to rebuild positions.
(continuously updated)
Most Read by Bloomberg Businessweek
©2022 Bloomberg LP