China’s Markets End August Among the World’s Losers

(Bloomberg) -- It’s been a bad August for investors in Chinese assets.

The yuan has fallen almost 4% to head for a record monthly loss, after breaking through the 7 per dollar support level that held for years. Chinese bonds returned a negative 2.5% in dollar terms, making them the biggest losers on the Bloomberg Barclays Global Aggregate Index. A gauge of Chinese stocks in Hong Kong has retreated more than 5%.

A dramatic escalation of the trade war and growing concern over the health of the global economy were behind August’s losses, while clashes in Hong Kong added to the risk-off sentiment. Although stocks rose on Friday after China indicated it wouldn’t immediately retaliate against the latest American tariff increase, the outlook remains cloudy, with analysts projecting further weakness for the yuan.

“We don’t have any particularly good news to draw funds in, and people will cautiously wait to see if China and the U.S. will get back to the negotiating table next month,” said Steven Leung, executive director of UOB Kay Hian (Hong Kong) Ltd. “Sentiment might improve a bit if talks continue, though it’s unlikely we will get any deal in the near term.”

Analysts are struggling to decipher the intentions of the People’s Bank of China. While it has set the daily fixing stronger than expected in recent days, the yuan still capped a 10-session losing streak, its longest since 2015. The depth of the declines has suggested to some the authorities are using currency weakness to cushion the economic impact of additional tariffs. The yuan slipped 0.09% to 7.1491 a dollar as of 5:08 p.m. in Shanghai.

Mainland shares have proven resilient compared to those traded in Hong Kong. The benchmark Shanghai Composite Index fell 1.6% this month in local currency terms.

Domestic investors haven’t piled into safer Chinese assets, though. While government bond yields globally have fallen amid mounting worries a recession is looming, the cost on China’s 10-year notes yield declined just 10 basis points in August. The yield remains above 3%, a level it hasn’t closed below since 2016, as traders assess a revamp of the interest-rate system.

There’s less fear that a dropping yuan will spur capital flight or limit monetary policy than there was after the 2015 devaluation, said Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong. Still, the simmering trade dispute means "we are remaining quite cautious for the following weeks and the quarter.”

--With assistance from Helen Sun.

To contact Bloomberg News staff for this story: Livia Yap in Shanghai at lyap14@bloomberg.net;Amanda Wang in Shanghai at twang234@bloomberg.net;Yuling Yang in Beijing at yyang329@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Philip Glamann, Magdalene Fung

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With assistance from Bloomberg