Chinese Stocks Slide Most in Seven Weeks as Trade Optimism Fades

(Bloomberg) -- Chinese stocks slid in Hong Kong and Shanghai amid concern over trade talks with the U.S. and government efforts to cap coal price gains. The yuan neared a four-month low against the greenback, while bonds gained.

The Hang Seng China Enterprises Index slumped 2.1 percent at the close, its biggest retreat in seven weeks, while the Shanghai Composite Index dropped 1.4 percent to close at its low for the day. Losses were across the board, with energy producers falling most after the government interceded to cool coal price gains, while insurers also tumbled. The yuan depreciated 0.3 percent, and the yield on 10-year debt fell to a two-week low.

Signs of improving relations with the U.S. had driven gains in recent weeks in Chinese equities, with the Shanghai measure closing at a two-month high on Tuesday. President Donald Trump said yesterday he’s “not really” pleased with the results of the trade talks, while a planned summit with North Korea’s leader -- and China ally -- is also looking shaky. Rising defaults among Chinese companies added to jitters among investors.

"Trump’s comments that he’s not satisfied with the trade negotiations with China poured cold water on markets, since they were pricing in a truce," said Castor Pang, head of research at Core-Pacific Yamaichi HK in Hong Kong.

China Shenhua Energy Co., China Petroleum & Chemical Corp. and Cnooc Ltd. plunged more than 6 percent in Hong Kong, while Yanzhou Coal Mining Co. fell by the 10 percent daily limit in Shanghai. The government wants to get the coal price below 570 yuan a metric ton, Shanghai Securities News reported Wednesday.

"News of China’s regulator seeking to lower coal prices hurt sentiment and energy stocks as investors worry other resources prices may be suppressed and lead to deteriorating corporate earnings," said Ken Chen, a Shanghai-based analyst with KGI Securities Co. "People expect sectors with high leverage, like cyclical and property firms, may see increasing number of defaults as China pushes forward with its deleveraging drive."

Corporate defaults are piling up in China’s onshore bond market as a government crackdown on leverage chokes financing for private-sector companies. At least 14 bonds have missed payments so far this year. Among the six first-time defaulters in 2018, four were listed firms, according to Bloomberg-compiled data.

©2018 Bloomberg L.P.