Disappointment at the response by financial authorities in China to the country’s economic slowdown caused local stock markets to sink to nine-month lows on Monday, while the yuan also fell.
China’s blue-chip index, the Shanghai Composite, fell 1.24%, while the Hang Seng in Hong Kong dropped by 1.8% – to their lowest levels since late November last year, as foreign investors become less confident in Beijing’s ability to restore momentum in the economy.
A smaller-than-expected cut in a key lending benchmark underwhelmed markets and highlighted the constraints the central bank faces in trying to revive demand through monetary easing amid broader worries about currency weakness and capital flight.
The world’s second-largest economy is currently facing an unprecedented debt crisis in its massive property sector, which has soured investor sentiment in the country as growth stalls.
‘Corporates and households are deleveraging’
The declines came even as listed firms and fund managers heeded the securities regulator’s call and rushed to unveil share purchases over the weekend.
“China’s corporates and households are in a deleveraging mode, and rate cuts will not be enough to change that. Authorities are likely starting to realise that,” Charu Chanana, market strategist at Saxo in Singapore, said.
“Rate cuts only put more pressure on banks, and broader measures to address capital adequacy and solvency issues will be needed to revive sentiment and activity levels.”
The onshore yuan eased roughly 0.3 per cent to about 7.30 per dollar.
The dip came despite Beijing’s recent vow to stabilise the currency and much stronger than expected central bank guidance, as investors struggled to shake broader worries about weak exports, sluggish consumption and property market woes.
Earlier on Monday, China lowered its one-year benchmark lending rate, but surprised markets by keeping unchanged the five-year rate – on which mortgage rates are based.
Analysts say Monday’s modest rate cut shows authorities are concerned about the risks of a major yuan selloff and capital flight, with any easing likely to widen the yawning gap between interest rates in China and its major trading partners.
Those worries could limit the scope policymakers have to loosen monetary settings, which would only add to investor disappointment about Beijing’s response to the current economic slowdown.
“Probably China limited the size and scope of rate cuts because they are concerned about downward pressure on the yuan,” Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui DS Asset Management, said. “Chinese authorities care about currency market stability.”
Investors ‘disillusioned’ by China firms’ share buybacks
Investors were unenthused despite dozens of China-listed companies outlined plans over the weekend to purchase their own shares in answer to regulators’ call for share buybacks.
More than 30 companies including chipmaker Loongson Technology Corp and Xian Manareco New Materials Co said in identical statements that their controlling shareholders had proposed buying back shares because of “confidence in the companies’ future development and value”.
Meanwhile, at least a dozen asset managers, including E Fund Asset Management Co and China Asset Management Co said they would use their own money to buy into equity funds.
Yang Tingwu, vice general manager of hedge fund house Tongheng Investment, said “such statements are merely gestures and the money involved is negligible.”
“The market was disillusioned by the regulators’ measures, which basically mean the current stock market level is acceptable.”
The package of measures announced by the China Securities Regulatory Commission (CSRC) on Friday include cutting trading costs, encouraging long-term investment and studying plans to extend trading hours.
But the CSRC didn’t announce a cut in stamp duty or the introduction of a so-called “T+0” trading mechanism to allow shares to be bought and sold on the same day – measures that had been keenly anticipated by investors.
Reflecting market pessimism, Goldman Sachs on Monday cut its forecast on Chinese stocks, expecting a lower trading range until more forceful responses to the housing market woes.
Hong Hao, chief economist at GROW Investment Group, said China needs policy goals that include specific numbers, such as the size of infrastructure stimulus, or how many flats will be redeveloped under the urban village revamp programme.
“To boost confidence, what we need now is a ‘flood-irrigation’ approach rather than targeted, piecemeal policies.”
Markets in Tokyo, Seoul, Mumbai defy China gloom
China’s smaller-than-expected rate cut spurred deflation concerns and weighed on the broader Asian markets.
The gloomy mood in China and Hong Kong dragged down shares in Sydney, with the ASX falling 0.4%, but stocks in Korea edged up by 0.17%, while the Nikkei index in Tokyo rose by 0.37%.
Meanwhile, the Stock Exchange of Thailand rose by 0.44% on hopes that a new coalition government led by Pheu Thai Party will be approved by the two Houses of Parliament on Tuesday, because it includes former military officials from the previous regime.
Indian IT stocks lift the Nifty 50 and Sensex
Indian shares also rose on Monday, recovering from a dull start, as a rebound in IT and financial stocks outweighed the slide in Reliance Industries following spin-off Jio Financial’s weak trading debut.
The Nifty 50 index was up 0.50% at 19,407.05 at 1:49pm, while the S&P BSE Sensex rose 0.51% to 65,279.51.
IT stocks were up over 1.2%, rebounding from a 1.47% tumble on Friday on worries about higher US interest rates.
“A lot of good mid-cap IT firms, which were at lofty valuations, have corrected massively in the last 10-12 months making them attractive buy opportunities at the current levels,” Aishvarya Dadheech, chief investment officer at Fident Asset Management, said.
Financials rose 0.6% after a seven-day losing run in which they shed about 3%. Bajaj Finance gained 2.4%, set for its first increase in six sessions.
On the flip side, fellow NBFC Jio Financial tumbled 5% in its market debut, hitting a lower circuit. That led parent Reliance 1% lower, with both stocks among the top Nifty losers.
Adani group stocks climbed between 1% and 6%. Adani Ports and Special Economic Zone was up 2.4%, adding to its gains from Friday after GQG Partners raised its stake in the company.
Adani Enterprises increased over 2% and powered a 1% rise in metal stocks despite concerns over the economic revival in China, the world’s largest metals producer and consumer.
“Till there is some clarity from Fed, the (Indian) markets will be rangebound given the weakness in China,” Dadheech added.
- Reuters with additional editing by Jim Pollard