Year in China Markets: Yikes for Stocks, Yuan Falls, Bonds Rally

(Bloomberg) -- A rough year for China’s markets draws to a close, with tired stocks near multiyear lows. The yuan, despite a bump higher this month, is still one of the weakest Asian currencies in 2018. At least bonds have done OK.

Equities have demanded plenty of attention due to the eye-watering size of the slump -- $3 trillion wiped off China’s stock market since a January peak -- and because they’ve been hurt by the trade dispute with the U.S. The yuan’s near 8 percent slide from June to mid-August also weighed on sentiment over a bruising summer.

The following is a summary of China’s markets this year, and some views for 2019 as hopes quietly build that it will be a better one for investors.

Sliding Stocks

Things looked pretty good for stocks at the start of the year, as the Shanghai Composite Index climbed to its highest since 2015, while Chinese shares in Hong Kong staged a record 19-day stretch of gains. The signs of overheating were there, and sure enough that heady January run is now a distant memory.

Year in China Markets: Yikes for Stocks, Yuan Falls, Bonds Rally

The Shanghai Composite is near its lowest since November 2014 after falling 25 percent this year, making it the worst-performing major stock market in the world. In addition to the trade war and weakening yuan, sentiment was hit by a deleveraging drive that squeezed margin debt to a third of its 2015 peak, when investors borrowed record sums to bet on gains.

Meanwhile, 75 Chinese mutual funds with an equity focus liquidated this year, according to data compiled by Bloomberg. That’s the most since 2007, when data became available.

In Hong Kong, the Hang Seng Index has retreated 15 percent. AAC Technologies Holdings Inc. is the worst performer on the benchmark, sliding 68 percent. The tech powerhouse Tencent Holdings Ltd. has also weighed on the index with a 24 percent drop. That decline is the company’s worst year on record.

How about the outlook? Most stock forecasters are looking forward to a brighter year, with the Shanghai Composite likely climbing to 2,950 points, a Bloomberg survey showed, implying a nearly 20 percent gain from its current level. Hopes of easing U.S.-China tension and an economic rebound in the second half are expected to lift sentiment.

Yuan Weakens

China’s currency has tumbled more than 5 percent this year, pressured by bets the central bank will loosen monetary policy to aid economic growth and that depreciation could be used as a weapon in the trade war.

The yuan fell to the weakest in a decade in October, edging closer to the milestone of 7 per dollar -- a level not reached since the global financial crisis. The currency rebounded though, fueled by speculation the world’s two largest economies were moving closer to a deal on trade. The exchange rate has since stabilized toward the end of the year.

Unlike in 2016, the weakness didn’t trigger panic and massive fund outflows thanks to already tight capital controls. Still, the depreciation prompted tougher management of the currency and China made it more expensive for traders to bet against the yuan in the forwards market.

Year in China Markets: Yikes for Stocks, Yuan Falls, Bonds Rally

China watchers are becoming less pessimistic on the currency as trade tensions ease. Global investment banks including Goldman Sachs Group Inc. and UBS Group AG have raised their forecasts. Standard Chartered Plc expects a 3 percent advance to 6.65 per dollar by the end of next year.

Bonds Rally

Government bonds bucked analyst forecasts. The yield on 10-year sovereign debt slid 60 basis points amid signs of a slowdown in the economy and as the stock market meltdown sent investors to safer assets. Chinese government bonds are some of the best performing in the world in 2018.

Year in China Markets: Yikes for Stocks, Yuan Falls, Bonds Rally

The People’s Bank of China has cut the reserve requirement ratio four times this year, adding so much liquidity that money market rates fell to multiyear lows in August.

While foreign investors turned net sellers of Chinese bonds in November for the first time in almost two years, net inflows topped 450 billion yuan ($65 billion) in 2018. Thanks to global index inclusions, overseas funds will add $80 billion of onshore debt in 2019, according to Morgan Stanley.

©2019 Bloomberg L.P.