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China shares drop as investors ignore Beijing

Oct 09,2018
China stocks tumbled on Monday, as investors back from a long holiday dumped shares across the board despite Beijing’s weekend move to spur more lending at a time of growing fears that the economic impact of the Sino-U.S. trade war will deepen.

Spot yuan was on track for its lowest close in seven weeks against the U.S. dollar, as expectations of more easing measures by China, plus surging U.S. bond yields, put pressure on the Chinese currency.

Beijing has stepped up liquidity support across the financial sector in recent months as policymakers have focused on calming fears of capital outflows and sought to soothe battered markets as anxiety grows that the tit-for-tat trade war with the United States could deal a damaging blow to the broader economy.

“There’s an acute shortage of confidence in the market. Few investors are buying,” said Alvin Ngan, a Hong Kong-based analyst at brokerage Zhongtai International.

“China’s economy is under heavy downward pressure ... and you need time to observe if recent easing measures are effective or not,” he added.

On Monday, the blue-chip CSI300 index plummeted 4.3 percent to 3,290.90 points, its sharpest one-day percentage fall since February 2016.

The Shanghai Composite Index lost 3.7 percent, to 2,716.51 points, its worst day since June 19. For the year, both Chinese indexes are down about 18 percent.

Last week, Hong Kong’s Hang Seng slumped 4.4 percent as investors worried about the escalating trade row. Hong Kong’s benchmark was off 1.2 percent in late trading on Monday, and poised to close at the lowest level in 15 months.

Monday was the first chance for mainland investors to react to the escalating trade tensions and a sell-off in Hong Kong markets last week after a week-long holiday on the mainland to celebrate National Day.

On Sunday, the People’s Bank of China (PBOC) announced a 100-basis-point cut to banks’ reserve requirement ratio (RRR), stepping up efforts to support the economy and calm market worries.

“An RRR cut is not enough to counter the impact of the trade war. The economy is quite weak, and I see a growing number of companies putting their assets up for sale” due to pessimism, said David Dai, general manager of Shanghai Wisdom Investment, a hedge fund.

“And today’s fall is not surprising after weak performance in external markets during the holiday.”

Last week, U.S. Vice President Mike Pence intensified Washington’s pressure campaign against Beijing by accusing China of “malign” efforts to undermine President Donald Trump ahead of next month’s congressional elections and of reckless military actions in the South China Sea.

And on Friday, Chinese technology stocks listed in Hong Kong, including Lenovo and ZTE, slumped on a Bloomberg report that the systems of multiple U.S. companies had been compromised by malicious computer chips inserted by Chinese spies.

China’s IT sector fell sharply on Monday, falling over 5 percent as they played catch-up with their Hong Kong peers. Shenzhen-listed shares of ZTE were down over 8 percent at close.

Real estate, consumer and healthcare sectors were also among the biggest casualties, all tanking more than 4 percent.

The market’s obliviousness toward the RRR cut highlights concerns that monetary easing alone would do little to heal battered confidence.

“Cutting RRR at a time of relatively ample liquidity in the banking system is not likely to have much effect,” wrote Zhao Jian, a finance professor of the University of Jinan.

“Liquidity is not the issue. The issue is the loss of confidence,” said Zhao, adding China is in a “liquidity trap” where there’s a shortage of credit demand from the real economy, especially the private sector.


Reuters