China’s Markets Embrace Risk as Traders Bet Big on Stimulus

(Bloomberg) -- Chinese financial markets are rediscovering an appetite for risk not seen in months, taking cues from the government’s biggest push yet to invigorate this year’s slowing economy.

The CSI 300 Index of mainland stocks climbed 1.6 percent Tuesday, capping its biggest three-day gain since mid-August 2016, when economic indicators vindicated China’s moves to stabilize a slowdown back then. While there’s no guarantee of success this time, with the X-factor of a trade dispute with the U.S. at play, traders are betting big.

The rally looked to continue Wednesday, with futures on the FTSE China A50 rising 0.6 percent. The offshore yuan is holding near the weakest in more than a year against the dollar after Monday’s record injection of funding to lenders by the People’s Bank of China. Benchmark 10-year government bond yields have risen from the lowest since April 2017.

The moves could portend an end to the bearish sentiment that’s clouded China’s markets for months. Investors have been fleeing equities and taking shelter in bonds, spooked by a deleveraging campaign that’s contributed to a record run of corporate defaults and a slide in public investment. Prospects for U.S. tariff hikes on an increasing swathe of Chinese exports haven’t helped. It all added up to a $2 trillion equity wipeout from January highs.

“It’s a concrete sign of coordinated stimulus and addresses one of the key factors that’s been weighing on Chinese markets,” said Aidan Yao, a senior economist at AXA Investment Asia Ltd. in Hong Kong. “Fiscal and monetary authorities are providing the liquidity needed to support the economy. For markets, the past week has really mitigated domestic risks.”

Among the steps by policy makers that are cheering traders:

• A State Council statement Monday that said fiscal policy should be “more proactive.”
• The PBOC’s offer of 502 billion yuan ($74 billion) of one-year loans to banks Monday, the largest use of the medium-term lending facility since it started in 2014.
• The central bank’s move Friday to soften the implementation of tighter regulation of wealth management products, which had fueled the shadow-banking sector.
• Guo Shuqing, the head of China’s banking and insurance regulator, corralled executives from the nation’s biggest banks on July 17 and urged them to help take the lead on boosting loans, especially to small and micro enterprises.

Banking shares have been some of the biggest beneficiaries of the current rally, rising 6.5 percent in three days for their best run in almost two years. Industrial companies -- a group that would benefit from infrastructure projects -- soared 3 percent Tuesday, their biggest rally since May 2016. Materials shares also rallied.

It’s all a big turnaround from just three weeks ago, when the CSI 300 hit a 14-month low. Not even expectations for the best earnings growth in eight years had been enough to draw buyers back in.

There are plenty of reasons for caution. Some analysts are saying China is unlikely to embrace the scale of stimulus of years past, with President Xi Jinping and his lieutenants having repeatedly expressed concerns about the dangers of leverage and a build-up of financial risks. The end-game of President Donald Trump’s moves to curtail Chinese companies’ access to the world’s biggest economy is also unknown.

Some Skeptical

“Even though stimulus will support the market and economy, it’s not a game changer,” said Xia Le, chief Asia economist at Banco Bilbao Vizcaya Argentaria SA. “China will continue to crack down on shadow banking, and that will still pressure banks’ liquidity in the long term -- it’s just that the pace will be slower. This is not a turning point for a sustained advance in stocks and riskier bonds.”

That probably won’t stop equities from rallying on the next PBOC easing move, however. Economists widely expect further reductions in the required reserve ratio, unlocking liquidity in a financial system that’s been constricted by steadily diminishing gains in money supply.

Recent measures “provide important reassurances to investors of proactive government policies to contain the downside growth risks and should continue to anchor sentiment,” United Overseas Bank Ltd. economists Suan Teck Kin and Ho Woei Chen wrote in a note to clients Tuesday.

--With assistance from Yinan Zhao and Tian Chen.

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, Christopher Anstey, Will Davies

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