(Bloomberg) — Things are going from bad to worse for Chinese equities, with a key index tumbling into a bear market as disappointing manufacturing data added to the bleak outlook.
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A gauge of Chinese stocks in Hong Kong dropped over 20% from its recent peak to enter a bear market while the Hang Seng Index also retreated. The offshore yuan plummeted to a six-month low while commodities from copper to iron ore slumped.
Global funds are beating a hasty retreat as a slew of disappointing data, geopolitical risks and continued weakness in the property sector hurt sentiment. Calls for more policy support are growing, with concerns about a faltering Chinese economy being felt far beyond its shores.
“The weakness has been expected for months now, so the data is just another reason for the market to drag its feet,” said Yang Zhiyong, executive director of Beijing Gemchart Asset Management Co. “There were a lot of pledges on supporting the economy earlier in the year, but none of that is coming to fruition, which is what is most frustrating to me.”
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Hong Kong’s benchmark Hang Seng Index headed for bear market territory before pulling back, while the Hang Seng China Enterprises Index fell 1.9%. Both gauges posted their biggest monthly declines since February, having lost more than 8%.
The pessimism is pervasive. Just 16% of HSCEI members traded above their average share price in the last 50 days, compared with 58% in mid-April. The Hang Seng Index was the worst performing primary gauge on Wednesday.
The onshore CSI 300 Index, which wiped out all its gains for 2023 just a few days earlier, dropped another 1% on Wednesday.
The decline in stocks may have surprised some traders, who had already factored in further weakness given the recent run of poor data.
“The data will surely have some negative impact on the market, but this is not entirely surprising and the market has already priced in some of the weakness,” said Yan Kaiwen, an analyst at China Fortune Securities. “But the room for a further slide will be limited.”
Global funds aren’t waiting around to find out for sure. They turned net sellers of Chinese equities for a second straight month, something that hasn’t happened since the rout in October. Some China bulls, including Citigroup Inc. and Jefferies Financial Group Inc., have started to retreat, trimming portfolio allocations.
Overseas investors sold 3.8 billion yuan ($535 million) of mainland shares via trading links with Hong Kong on Wednesday.
“The reopening trade is over and now you can really feel the divergence,” said Patrick Wu, co-head of trading for Asia-Pacific and the Middle East at Credit Agricole CIB. “Global traders won’t be going onshore to buy assets big time now.”
Additionally, a depreciating Chinese currency is providing investors with another excuse to head for the exit. The offshore yuan fell to a six-month low of 7.1285 per dollar on Wednesday. The yield on 10-year Chinese government bonds dropped one basis point to 2.71%.
Bad Data
With the official manufacturing purchasing managers’ index missing estimates, traders sold industrial metals. Copper extended its worst monthly loss in almost a year and iron ore fell further below $100 a ton.
Even before Wednesday’s data, economists had been calling for China’s central bank to cut the reserve requirement ratio for major banks before the end of the third quarter.
To make matters worse, there are no signs of a thaw in tensions between Washington and Beijing. The US accused China of an “unnecessarily aggressive maneuver” after a Chinese fighter jet swerved in front of a US reconnaissance aircraft over the South China Sea. Beijing also recently declined a request from Washington for the countries’ defense chiefs to meet this week.
“China’s uneven economic recovery is one of investors’ concerns, along with geopolitics,” said Vey-Sern Ling, managing director at Union Bancaire Privee. “More stimulus from the government may help, but evidence of sustainable longer-term growth will be required to clear investors’ doubts.”
–With assistance from Tian Chen, Jeanny Yu, April Ma and Tania Chen.
(Updates with closing prices)
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