China Stock Rout May Worsen, Analysts Warn No End in Sight

(Bloomberg) -- Chinese stocks sunk into a bear market Tuesday, and analysts expect losses to deepen as concern over China’s economy, yuan weakness and a trade feud with the U.S. continue to rattle investors.

The Shanghai Composite Index closed at 2,844.51 points, 20 percent below a January high, denoting a bear market. A Hang Seng measure of Chinese companies in Hong Kong is down 19 percent from five months ago. The yuan weakened 0.3 percent to its lowest since Dec. 28.

Read on for analyst views on the decline and where they see the market going from here.

Hao Hong, chief strategist at Bocom International Holdings Co:

• There’s still a lot of selling pressure. Investors are rushing to exit to avoid risk
• “Lots of people listened to brokers’ advice to build positions around 3,000, betting on a rebound. They are now under big pressure to sell”
• Main reason for the plunge in Chinese stocks is slowing economic growth rather than pledged shares or the trade war
• “The key thing is that fundamentals in China are very bad. The market started to correct even before the trade war flared up”
• Hard to say shares have hit a bottom. And it’s hard for the government to solve the issue as it can’t flood the markets with new money

Tai Hui, JPMorgan Asset Management Inc. chief APAC market strategist:

• Market volatility in China is brought about by combination of factors: U.S.-China trade tension, concern over corporate bond defaults and uncertainty on the growth outlook
• Corporate bond defaults are arguably biggest worry at this point. Sentiment toward equities is likely to remain cautious for rest of this year
• Many onshore investors are mindful that authorities have deleveraging and financial risk reduction as a long-term objective, despite their willingness to provide liquidity near term
• Trade dispute impact is probably exaggerated. Many Chinese companies focus domestically and don’t have direct trade links with the U.S.
• Consumer sentiment in China remains positive. See structural demand for consumer services, such as health care and education services

Sun Jianbo, China Vision Capital president in Beijing:

• This is a typical bear market where the index keeps falling below supportive levels
• Not the bottom yet. Pessimism will keep growing as many companies are on the edge of margin calls and bond defaults. Those will cause further selloffs
• Shanghai Composite could fall at least another 10 percent
• Some long-term funds, including the so-called national team, may be interested in buying in the bear market zone

Qian Qimin, Shenwan Hongyuan Group Co. strategist based in Shanghai:

• Plunge in U.S. stocks overnight hurt confidence. NOTE: S&P 500 fell 1.4% Monday, biggest loss since April 6
• Liquidity usually very tight in banking system as end of June approaches
• Weakening yuan is hurting companies with high levels of dollar debt and exporters, dragging down some large caps such as airlines
  • Chinese Airlines Become Collateral Damage in Trade War With U.S.
• Don’t see the bottom yet. The market may keep falling since it’s still hard to gauge the impact of trade tensions and investors will keep cutting risk

Catherine Yeung, investment director at Fidelity International:

• Markets initially rose Monday following RRR cut, but the trade issue overhang is taking center stage and will probably see a lot more volatility
• China may do more to support market, potentially ramping up fixed asset investment, though it still needs to go through the deleveraging process
• The People’s Bank of China is in a better place than other central banks because it still has the tool set. Consumers are still spending
• Not beyond the realm of possibility for China long term to do bilateral deals with everyone else outside of the U.S., which surely isn’t good for American consumers
• China could still be an outperforming market this year because we’ve already seen it down, and maybe developed markets will see some outflows due to ongoing tensions
• The Chinese government has a flexible approach in terms of policy tools. Data show economic slowdown, but coming from a very high base

Lu Jie, head of China research at Robeco Investment Management:

• Amid A-share selloff, foreign investors would favor defensive stocks such as consumer goods that benefit from consumption upgrade while avoiding hit from trade war
• Upward trend in foreign fund inflows to China A shares is just beginning
• “I had roadshows in Singapore on June 19 when A shares tumbled, none of the investors I met asked questions about the market slump”
  • Foreign investors asked two questions: if China will have an economic crisis and whether Chinese companies will improve corporate governance

--With assistance from Cindy Wang and Amy Li.

To contact the reporters on this story: Jeanny Yu in Hong Kong at jyu107@bloomberg.net;Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net;Tian Chen in Hong Kong at tchen259@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Will Davies, David Watkins

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