The list of negatives facing the $6.6 trillion stock market is growing. The economy is already showing signs of vulnerability to a U.S. trade war before new taxes are levied at the end of this week. Analysts and investors alike are struggling to keep up with the yuan’s descent, while there’s been little sign of heavy state intervention to stem the slump in either stocks or the currency. Concern is also growing over the health of the country’s massive property market.
"Sentiment will remain bad in the near term," said David Qu, economist at Australia & New Zealand Banking Group Ltd. in Shanghai. "The market doesn’t hold high hopes that China and the U.S. will find a way out before the tariffs are imposed."
The Shanghai Composite has only risen on four days out of the past 15, and on each occasion the gauge has closed lower the following trading session. A momentum indicator is near a five- year low, while losses in Chinese bourses have topped $2 trillion since January’s peak. In percent terms, the Shanghai measure is the world’s worst after Argentina with a 22 percent retreat in the period.
"It would be a bad time to buy right now as pessimism prevails," said Liang Jinxin, Shanghai-based strategist with Tianfeng Securities Co.
Prime Beijing and Shanghai Property prices are not far off the levels of the world’s most expensive property markets on a price per square metre basis. China is a large country with a middle class larger than the total population of either the USA or EU but it is also a middle-income country where the ability to buy a home is beyond the reach of an increasingly large proportion of the citizenry.
In a market where internal controls are largely at the whim of Party officials the potential for misallocation of capital is high. These issues have been developing for years but, just as in other markets problems, with leverage and overdevelopment do not become problematic until credit conditions tighten.
Trade friction and the central bank’s efforts to contain the shadow banking sector are weighing on market sentiment. The A600 Banks Index dropped to a new low today and continues to lead the market lower.
Meanwhile the Yuan’s decline has been swift enough to evince some caution among investors with Morgan Stanley stating today they believe the central bank will intervene soon to support it.
The 10% jump in Bitcoin over the weekend and through today’s close is noteworthy. The cryptocurrency was a favoured vehicle for Chinese capital flight more than a year ago, and its strength is unlikely to have gone unnoticed in Beijing today. We can expect greater regulation of crypto trading and/or support for the Renminbi if its rally continues.
The Markit iBoxx USD Asian ex-Japan China High Yield Total Return Index is the closest I have found for China’s high yield market and most particularly for the higher risk US Dollar segment. The pullback since January is the largest since 2015. On every previous occasion, pullbacks have been buying opportunities but a clear and sustained upward dynamic will be required to signal a low of more than short-term significance.