Bear Market in Stocks, Weak Yuan Show China Problems Piling Up

(Bloomberg) -- A deepening sense of unease is rippling through China’s financial markets.

The benchmark Shanghai stock index has tumbled 20 percent in just five months to enter a bear market. The yuan is on track to match its longest losing streak on record in Hong Kong. Corporate defaults are mounting.

There are homegrown reasons for the concern: the nation’s deleveraging campaign is reducing the amount of liquidity available -- threatening growth in the world’s second-largest economy. Then throw in an unpredictable trade war with the U.S., and investors are facing a long list of reasons to sell.

Official efforts to calm nerves, from cutting reserve ratios to publishing upbeat editorials in financial newspapers, have had little effect so far. The Shanghai Composite Index’s failure to hold above 3,000 -- long seen as a level that would prompt state intervention -- has reduced appetite for bargain hunting. The gauge has been technically oversold for the past six days, the longest stretch since 2013, and losses in the stock market have totaled $1.8 trillion since January.

“Fundamentals in China are very bad,” said Hao Hong, chief strategist at Bocom International Holdings Co. “Selling pressure in the market is still very big.”

The Shanghai Composite failed to rebound Wednesday, dropping as much as 0.2 percent. The tech-heavy Shenzhen index had already entered a bear market in February. The MSCI China Index of mostly offshore stocks has fallen 14 percent from its 2018 high.

The selloff is a stark reminder of how quickly things can unravel in China -- only months ago, it had looked like investors were finally getting a better deal after years of disappointing returns. The Shanghai Composite had its best start to a year since 2009, while back then the currency was surging at its fastest pace since at least 2007.

The fall back to earth looks more like 2015, when the bursting of an equity bubble and surprise currency devaluation roiled global markets and caused international money managers to question the Communist Party’s grip on the economy. While officials eventually succeeded in bringing the nation’s markets under control, they’ve sought to tackle the bigger issue of excessive debt, which meant restricting the hidden channels of capital that flow throughout China’s financial system.

“Many onshore investors remain mindful that the authorities still have deleveraging and financial-risk reduction as their long term objective, despite willingness to provide liquidity in the near term,” said Tai Hui, JPMorgan Asset Management’s chief market strategist for Asia Pacific. “Sentiment could remain cautious.”

The Shanghai Composite has tumbled 8.2 percent this month, poised for its worst performance since January 2016, even as MSCI Inc. added the nation’s shares to its global gauges, while the yuan has dropped 2.9 percent. Bonds are the standout, with the 10-year yield near a two-month low, as investors sought refuge.

Losses accelerated last week after President Donald Trump threatened duties on $200 billion in Chinese imports, and another $200 billion after that if Beijing retaliates. While White House trade adviser Peter Navarro on Monday sought to ease investor concerns about U.S. trade policy, there’s jitters over whether China’s economy can withstand a sustained attack from Trump.

Markets elsewhere have also started to buckle, with U.S. stocks finally showing signs of weakness on Monday. Redemptions from equity funds globally reached $13 billion in the week through June 20, and some of the world’s biggest money-managers are trimming risk while adding to their cash holdings.

Many of their Chinese counterparts feel the same way.

“The market may keep falling since it’s still hard to gauge the impact of trade tensions,” said Qian Qimin, a Shenwan Hongyuan Group Co. strategist in Shanghai. “Investors will keep cutting risk.”

--With assistance from Kana Nishizawa and Jeanny Yu.

To contact the reporter on this story: Sofia Horta e Costa in Hong Kong at shortaecosta@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Sarah McDonald

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