The World's Best and Worst Markets Are Both in China This Year

(Bloomberg) -- The diverging fortunes of China’s equity and sovereign-bond markets became increasingly apparent this week.

Stocks are under renewed threat as the Trump administration potentially dials up its campaign against what it sees as cybersecurity risks from China. Equipment makers trading in Shenzhen, Hong Kong and Taipei were hit hard on concern the U.S. will succeed in persuading countries to avoid hardware made by companies perceived to have ties to the Chinese government.

November started off as an improvement for China’s equity investors, but the Shanghai Composite has now given up its gains for the month and is unlikely to avoid having its worst annual performance in a decade.

Ample liquidity

The story is entirely opposite for China’s government bond market, where a world-beating rally keeps going. The one-year yield sank to its lowest since 2016 after falling below the U.S. equivalent last week. Bond bulls cite the country’s slowing economy and looser monetary policy, as well as growing demand for havens. One caveat: coupled with the yuan’s decline, the bond rally has made lower-yielding Chinese assets far less attractive to foreign investors.

Traders say there’s plenty of liquidity to go round, a factor that’s allowed the central bank to refrain from injecting cash into the financial system for 21 straight days -- the longest stretch since daily operations began. Should liquidity get tighter around year-end, as it often does, they’re expecting the People’s Bank of China to step in.

Checking in on IPOs

While Hong Kong’s IPO bankers are set for their best year since 2010, investors who bought those shares are having a pretty bad one. The city’s new listings have struggled in this year’s bear market, with many quickly falling below their issue price and remaining there.

This week, investors had the chance to scrutinize the financials of two high profile debuts: Xiaomi Corp. and Meituan Dianping. The former managed to deliver another quarter of soaring sales, impressing traders who expected it to fall victim to slowing global smartphone demand. Meituan, however, slumped as much as 14 percent Friday after the food-delivery giant showed it is struggling to compete.

Chart of the week

It seems that every time Tencent Holdings Ltd. bulls score a victory, it’s all but gone the next day. The biggest stock in Asia failed to hold above its 50-day moving average after closing above that level for the first time since June.

Catching up

Here’s what else caught our eye.

• China’s capital controls keep a bad year from getting worse.
• Economists are being nudged by the Communist Party.
• One company’s restructuring plans get the bond market nervous.
• While a chain of debt guarantees leaves it vulnerable to contagion.
• Get ready for a steel mega merger.

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, Will Davies

©2018 Bloomberg L.P.