China Market Turmoil Amps Up Pressure for Policymakers to Act

Red flags are popping up across China’s financial markets, making investors increasingly anxious about the health of the economy and intensifying pressure on policymakers to act.

(Bloomberg) — Red flags are popping up across China’s financial markets, making investors increasingly anxious about the health of the economy and intensifying pressure on policymakers to act.

Renewed concerns about the property sector, missed payments by one of the nation’s largest private wealth managers, unprecedented losses at China-focused hedge funds and the threat of deflation have all combined to deal a blow to investor sentiment. A gauge of Chinese stocks listed in Hong Kong slumped again on Monday and is now the worst performer this month among 92 global equity measures tracked by Bloomberg. The offshore yuan fell toward its weakest level this year.

Global funds were net sellers of onshore Chinese equities for a sixth straight session on Monday, helping put the benchmark CSI 300 Index on track to erase all the gains seen since the nation’s top leaders promised pro-growth policies at the Politburo meeting on July 24. Economic data since has shown that the recovery is losing traction, with investors concerned that Beijing’s steps to counter the slowdown have proved too little, too slow.

“The market sentiment is ultra weak and the Politburo boost looks like it was just an interlude amid the pessimistic theme that has prevailed over the past months,” said Wang Mingli, executive director at Shanghai Youpu Investment Co. “After a brief round of optimism, investors are again disappointed as they realize that policies are still not concrete enough to offer a real lift to the economy.”

Troubles at Country Garden Holdings Co. were in focus again on Monday, with its shares plunging 18% after closing below HK$1 for the first time ever last week. Its bonds have fallen deep into distress, indicated below 10 cents. 

The developer, formerly China’s biggest, said it was suspending trading of 11 onshore bonds. Morgan Stanley downgraded the stock to underweight from equal-weight, saying it could take years for Country Garden to recover from its liquidity challenges given its large exposure in low-tier cities. 

Depressed Sentiment

Signs of stress in China’s shadow banking industry also fueled the selling on Monday. Three firms said late Friday they failed to receive payments on products issued by companies linked to Zhongzhi Enterprise Group Co., one of the nation’s top private wealth managers.

“With rising default events and disappointing July credit data, we may see a rise in policy support to stabilize growth and ensure financial stability,” JPMorgan Chase & Co. analysts including Katherine Lei wrote in a report on Monday. “Potential policy supports include RRR cut and a small-scale LGFV bailout program by the government. However, we do not expect large-scale monetary easing or fiscal stimulus at this moment.”

The Hang Seng China Enterprises Index lost 1.8% on Monday, adding to last week’s 2.9% slide. Property developers, financials and tech companies were among the worst performers. The CSI 300 slumped as much as 1.8% before closing 0.7% lower. It is 1.3% away from erasing its post-Politburo rally.

“We keep saying a lot of the negatives have been priced in, but the market is still fixated on any weakness rather than the recovery,” said Ma Xuzhen, fund manager at Longquan Investment Management.

READ: Yuan Falls Toward This Year’s Low as Chinese Economy Sputters

Hedge Funds

Overseas funds sold a net 4.7 billion yuan ($643 million) of onshore China stocks on Monday via trading links with Hong Kong. They withdrew a net 25.5 billion yuan last week, the most since October.

As foreign investors lose interest in China, hedge funds that target the world’s second-biggest economy are paying the price. The number of active China-focused hedge funds has slipped for the first time since at least 2012, with only five new funds launched this year as of June, according to data from Preqin Ltd. Another 18 funds were liquidated, the data show.

Global multinationals turned “less optimistic” on China in the second quarter of 2023 as measured by macro, consumption, labor and cost metrics, according to Morgan Stanley’s AlphaWise Global MNC China Sentiment Index. That was the first time since late 2021 that sentiment had worsened on all four counts, strategists including Laura Wang wrote in a note.

“There’s indeed a massive wall of worry for China bulls,” said Derek Tay, head of investments at Kamet Capital Partners Pte. 

–With assistance from Jeanny Yu.

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