Chinese Stocks Enter Bear Market as Trade, Growth Risks Increase

(Bloomberg) -- Chinese stocks fell, with the benchmark gauge entering a bear market, amid growing concern about the country’s resilience to a trade war with the U.S.

The Shanghai Composite Index fell 0.5 percent at the close, taking its loss since a January high to more than 20 percent. Airlines extended a rout as a slumping yuan boosted the cost of their dollar-denominated debt, while property developers also sank.

Investors have largely ignored government measures to support market sentiment, including a weekend reserve-ratio cut and scrutiny on the liquidation of pledged stock, as trade tensions added to concern about Beijing’s deleveraging campaign and weaker-than-expected economic data. The latest stock rout, coming three years after China’s equity bubble burst, has now wiped out $1.8 trillion through Monday since January’s high.

"Pessimism will keep growing as many companies are on the edge of margin calls and bond defaults," said Sun Jianbo, China Vision Capital president in Beijing. "The benchmark Shanghai Composite Index will fall at least 10 percent from the current level."

The yuan weakened 0.3 percent to a six-month low, while the offshore exchange rate slid for a ninth day, its longest losing streak in more than four years. Bonds rose, with the 10-year government yield dropping one basis point to 3.59 percent.

"I don’t see the bottom," said Qian Qimin, a strategist at Shenwan Hongyuan Group Co. in Shanghai. "The weakening yuan is hurting companies with high levels of dollar debt."

Such is the depth of selling in Hong Kong that 26 percent of the companies on the Hang Seng China Enterprises Index fell to fresh one-year lows on Monday -- the biggest proportion since a market shake up in early 2016.

The Shanghai Composite is now down 14 percent for the year, the worst performance among major benchmarks, while valuations have fallen to the lowest in more than two years. Escalating trade tensions have come at a bad time for the government in Beijing, with deleveraging efforts tightening liquidity and threatening to slow economic growth. China’s broadest measure of new credit slumped in May to the lowest in almost two years, data this month showed.

"Fundamentals in China are very bad," said Hao Hong, chief strategist at Bocom International Holdings Co. "The market started to correct even before the trade war flared up."

©2018 Bloomberg L.P.