China Triple Whammy Sees Stocks, Bonds, Yuan All Sink in April

(Bloomberg) -- A huge tumble in government bonds, the worst rout in months for stocks and a weakening yuan -- April was a month of selling in China’s markets.

There was no place to hide as the risk-on rally that had added some $2.5 trillion to the world’s top-performing equities started to lose steam. The Shanghai Composite Index is down for the month amid record foreign selling and small caps just entered a correction. China’s sovereign debt is heading for its worst monthly drop in more than eight years, while the yuan slid the most since October.

With mainland trading shut from Wednesday for three days, investors will be looking for fresh catalysts next week. They’re facing a growing pile of headwinds, the latest being a rallying greenback that often hurts stocks as well as the yuan. A slew of economic reports could bring more volatility to bonds, as traders consider whether good news -- an improving economy -- is bad news for stimulus.

“Chinese bonds will fluctuate in May, as investors take a break from selling and wait to see more data to judge whether the economic recovery is sustainable,” said Liu Dongliang, a senior analyst at China Merchants Bank in Shenzhen. He expects the 10-year sovereign yield to hover around the 3.4 percent level in the near term.

"Stocks might be a better investment relative to bonds, as companies’ earnings will likely improve,” he said.

Fresh off their best quarter since 2014, Chinese stocks slipped in April as investors took profit from some of the most overheated trades. Traders based overseas dumped 18 billion yuan ($2.7 billion) of mainland shares this month via trading links with Hong Kong, the most since the link opened in late 2016. A barrage of uninspiring earnings haven’t helped.

Looking ahead, weaker manufacturing data on Tuesday may have helped make a clearer case for more stimulus. Traders have signaled they think economic recovery isn’t yet strong enough for Beijing to scale back support measures.

Zhu Junchun, an analyst at Lianxun Securities in Shanghai, is recommending small-cap stocks for May. They lagged their large-cap counterparts in April as investors typically seek shelter in companies with more predictable earnings, as well as state-backed enterprises. "We will leave the correction behind us as April comes to an end," he said.

--With assistance from Amanda Wang.

To contact Bloomberg News staff for this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;April Ma in Beijing at ama112@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, David Watkins, Sofia Horta e Costa

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With assistance from Bloomberg