Chinese Media Downplays Trump’s Tweets, Market Plunge

(Bloomberg) -- Donald Trump is testing the limits of China’s bull market, and Beijing’s patience.

His tweets threatening more tariffs on Chinese exports triggered the biggest equity losses in three years on Monday, with the Shanghai Composite Index sinking 5.6 percent. As some 1,155 stocks fell by the daily limit, the reaction in Beijing was to minimize the U.S. president’s impact: China’s Twitter-like platform removed posts about his comments, while state media didn’t prominently cover the rout.

There was barely any mention of the stock tumble on Tuesday. An article published by the China Securities Journal, one of the country’s most widely circulated financial dailies, argued that the bull market will resume. Only one Chinese-language newspaper -- the Global Times -- featured escalating trade tensions on its front page.

Trump’s top trade negotiator late Monday confirmed that the U.S. plans to raise tariffs on Chinese goods this week. Stock-index futures signaled traders will get some reprieve on Tuesday, with contracts on the FTSE China A50 Index adding 0.9 percent at 9.17 a.m. in Singapore.

Chinese Media Downplays Trump’s Tweets, Market Plunge

Monday’s selloff highlighted the vulnerability of China’s four-month bull run in equities. Shares had already been sliding amid evidence that Beijing is scaling back plans to support economic growth, as well as a lackluster earnings season and bearish technical signals. Most major indexes are now in a 10 percent correction, with investor exuberance giving way to the pessimism that dominated China’s financial markets last year.

Fears of a widespread unwind of leveraged trades may make matters worse, like it did in 2018 and after the bubble burst in 2015. China’s state funds have already been called to step in to stabilize the market if needed, though signs of intervention were limited on Monday.

“The sharp drop in stocks is likely to trigger a lot of liquidation for leveraged positions,” said Shi Junbo, a Beiijng-based money manager at Hangzhou Xiyan Asset Management Co. “The sell-off looks just like a circuit breaker. It’s a major blow to the market enthusiasm that has been built up since the first quarter.”

Investors had already been taking profit from some of the year’s hottest trades amid signs that the world-beating rally was losing steam in China. Overseas traders sold the most mainland stocks ever in April through stock links with Hong Kong, according to data compiled by Bloomberg. The ChiNext Index -- which was up 42 percent for the year about a month ago -- tumbled 7.9 percent Monday.

The question for traders is how much pain Beijing is willing to stomach. It was unclear whether state funds had bought stocks on Monday, though some usual suspects like PetroChina Co. trimmed losses in afternoon trading. While authorities have a history of intervening to maintain market calm, their heavy-handed policies backfired in 2015. A more pared back approach had limited impact in 2018 as stocks lost $2.3 trillion in value.

The market is yearning for a different kind of support from Beijing. Despite some early signs of success from the government’s tax-cut program, China’s economic recovery has so far underwhelmed equity investors.

“The government needs to come up with a basket of solutions to alleviate the market’s key concerns, rather than resorting to short-term boosts to stock prices,” said Raymond Chen, a Beijing-based portfolio manager with Keywise Capital Management Beijing Ltd.

The Shanghai Composite is still up 17 percent for the year, among the world’s top ten national benchmarks. But for a momentum-driven market where leverage has increased to almost 1 trillion yuan, the whiplash seen on Monday rarely ends without a catalyst.

“A nose dive in stocks is inevitable,” said Wang Mingli, an executive director at Shanghai Youpu Investment Co. “The way to weather this one is to lower exposure until it blows over. The market won’t be able to get over this shock in the short term.”

©2019 Bloomberg L.P.