China Traders Cheer Resilient Quarter Amid Hints of Fatigue

(Bloomberg) --

China’s financial markets have been among the most resilient globally this quarter, but cracks are appearing.

Capital controls, a surge of patriotic investing and a sense that the government is on top of the coronavirus pandemic have helped limit losses in 2020. The Shanghai equity benchmark fell nearly 10%, half the decline by MSCI Inc.’s global gauge. The yuan has weakened more than 1.8% against the dollar, compared with a 3.7% drop by a measure of Asian peers. While China junk yields nearly doubled offshore as dollar liquidity prompted a sharp spike toward March-end, premiums for their Asian peers increased nearly three fold.

Plentiful liquidity helped cushion the nation’s markets from the gutwrenching moves seen elsewhere. Yet the relative outperformance of local shares obscures more worrying signs: plunging turnover and rising volatility suggest traders are losing confidence in China’s ability to escape the economic destruction caused by a closed off world. Stocks fell after the central bank on Monday cut borrowing costs, signaling the impact of monetary stimulus is waning.

Here’s some charts showing how China’s markets have performed over the quarter.

Turnover on Chinese stock exchanges has fallen 60% after hitting its highest level since 2015 late last month. That’s a bad sign for a market driven by momentum investors.

Short-term borrowing costs in the country’s interbank market have started to rise after falling to the lowest level since 2006. That may add pressure to China’s traders and companies.

The rush to grab greenbacks sent many currencies tumbling earlier this month, a development that pushed the yuan up versus a basket of trading partners’ exchange rates. Such gains are unraveling, with yuan falling against the basket and touching its lowest against the dollar since October.

The divergence between China’s markets and those overseas led to something of a disconnect early in 2020. Premiums for China’s dollar high-yield bonds rose to an eight-year high, while those for domestic junk notes hit the lowest in three years. That illustrated the difficulty investors have in valuing companies caught between the dollar liquidity crisis and China’s efforts to help its markets and economy.

Chinese traders took advantage of cheap funding to snap up 10-year government notes. That helped push the trading volume of Chinese bonds to the highest level on record. The yield on China’s notes has tumbled more than 50 basis points this year to about 2.6%, set for its largest quarterly decline since 2008.

©2020 Bloomberg L.P.

With assistance from Bloomberg