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China’s Traders Are Cashing Out as Love for Risky Assets Fades

China’s Traders Are Cashing Out as Love for Risky Assets Fades

(Bloomberg) -- Investor credit at China’s brokerages is disappearing at the fastest pace in 10 months as a bleak earnings outlook prompts the country’s investors to conserve cash.

Borrowed money in stock accounts fell 3.5% month-on-month in March to 1.1 trillion yuan ($148 billion), according to data compiled by Bloomberg. Stock turnover is down around 60% from a February peak, showing how quickly participation in the equity market has cratered.

Some traders are switching to bonds and cash-like instruments instead, predicting stocks won’t really recover for at least another six months. The fading enthusiasm is in contrast with a surge of interest earlier this year, which pushed the sale of mutual funds to a record high.

China’s economy may be showing signs of restarting, but it and its companies face a growing threat from slumping external demand. Cracks in the market are appearing, with traders unconvinced that stimulus measures will be enough to boost domestic growth.

China’s Traders Are Cashing Out as Love for Risky Assets Fades

Yin Ming, vice president of Baptized Capital Co. in Shanghai, said he now has about 30% of his portfolio in cash, the highest level since mid-2015 after the stock market crash. His firm recently sold some stocks after prices hit their targets and he says there is no plan to add more in the near term.

“A lot of listed companies’ earnings will be hurt this year considering the time and demand they lost due to the virus and production halts,” said Yin. “Many investors, including long-term funds, might choose to stay on the sidelines given the doubt on fundamentals.”

Profits of Chinese industrial companies slumped the most on record in the first two months as the virus outbreak hurt business activities, the National Bureau of Statistics said last week. China International Capital Corp. said in a recent research note that the coronavirus outbreak could have a bigger impact on corporate earnings than the 2008 financial crisis.

Repos and Convertible Bonds

With demand for cash management rising, investors are turning to the repo market for what they see as better liquidity and positive returns. The volume of 1-day government bond repos traded on the Shanghai Stock Exchange rose 20% from the end of February to the end of March.

A cash financing facility that allows investors to lend money to borrowers with treasury as collateral, the government bond repo “is a very good tool for cash management, given its good liquidity and safe returns,” said Jiang Liangqing, a fund manager at Beijing-based Ruisen Capital Management, adding that he has been buying government bond repos traded on the Shanghai Stock Exchange over recent weeks.

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Others are turning to the country’s convertible bond market as the stock market cools. The value traded in that market more than quadrupled in March, according to data from the China Securities Index Co., as investors sought opportunities to make quick profits in a looser regulatory environment.

Convertible bonds offer equity-like returns with a more defensive tilt. As of April 1, a gauge tracking those assets showed a 4% advance since the stock market plunge of Feb. 3, outpacing the CSI 300 Index, which rose 1.6% Thursday.

“This is no time for bottom-fishing in stocks,” said Winter Han, general manager at Beijing Yingchuang Century Investment Management Co. He has recently cut stock exposure while increasing cash holdings and also using index futures to build short positions.

“For investors, the top priority right now is preserving the principal,” he said.

©2020 Bloomberg L.P.

With assistance from Bloomberg