Wave of Profit Warnings Leaves Chinese Stocks Seeking Buyers

(Bloomberg) -- China’s earnings season has barely started, yet it’s already such a shocker that authorities have come up with fresh policies to boost the country’s downbeat equity market.

Hundreds of profit warnings greeted investors before the official full-year reporting period kicks off. The sheer number of (previously profitable) firms saying they’ll post significant losses for 2018 triggered a wave of panic in Shenzhen’s equity market -- home to most of China’s start-ups and private companies -- and dragged stocks in the city to a four-week low. They bounced back Friday amid speculation the central bank will cut rates.

While a bad year was expected, traders were surprised that so many companies opted to take huge impairment charges in the fourth quarter following more stringent accounting rules issued in November. The logic: because many CEOs were already wrestling with a painful 2018 due to slowing demand and intensifying competition, they might as well take the hit in one go and start afresh, rather than absorb the losses over a number of years.

These are interesting times for Yi Huiman, who’s had a productive first week as head of the market watchdog. The China Securities Regulatory Commission unveiled a package of rule changes that will allow for greater risk-taking in the equity market. The aim is to attract capital -- both domestic and foreign -- to support stocks after regulators called on banks, brokerages and insurers to do their bit to help struggling companies last year. The financial sector is already too stretched, analysts said.

Next week is the Lunar New Year break. Mainland equity, bond and currency markets will reopen on Feb. 11.

Trading the slowdown

How will stocks, bonds and the yuan react to China’s economic slowdown and the government’s stimulus push this year? The currency seemed to defy all logic this week when it strengthened beyond 6.7 per dollar for the first time since July, only to reverse gains after dismal factory data Friday served as a reminder of how quickly growth is weakening.

It may be too late to join in on China’s government-bond rally. While the securities surged at the start of January thanks to plunging interbank borrowing costs, they fell victim to risk-on sentiment in the second half of the month. The yield on 10-year sovereign notes is still hovering just above 3 percent -- a key level that’s not been touched since 2016.

For clues on how the equity market is pricing in stimulus, look to auto stocks. Plans to boost the sector fell flat this week, with analysts saying the policies were too vague and subject to local-government approval. State-backed giants and companies with the strongest finances were clear winners in January for both the credit and equity markets, showing exactly where traders expect government support will go first.

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Chart of the week

Hong Kong’s equity benchmark closed above a key support level for the first time since June, a bullish sign on top of its 8.1 percent rebound in January.

Wave of Profit Warnings Leaves Chinese Stocks Seeking Buyers

Catching up

Here’s what else caught our eye:

  • Foreigners bought a record amount of Chinese stocks.
  • China’s Treasury holdings continue to tumble.
  • Investment bankers are essentially working for free.
  • Deutsche Bank seeks better access to China’s capital markets.
  • And S&P Global wants to rate more of the country’s bonds.
  • Hong Kong’s retailer stocks continue to lag.
  • Xiaomi’s thrown a spotlight on expiring IPO lockups.
  • The emerging-market bond rally still has legs.
  • There are three new ways to bet on Chinese commodity markets
  • Tencent backs a new long-short fund in Hong Kong.

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