Everything's a sell in China After US$828b equity rout

[HONG KONG] Investors got a stark reminder of how fast their bets can turn in China, where the most bullish trades are falling apart.

The country's currency was their latest favourite to succumb to a rout that has roiled financial markets around the world this week, losing as much as 1.2 per cent on Thursday for the biggest decline since the aftermath of its 2015 shock devaluation. That follows a selloff in large caps and banks that has wiped out about US$828 billion from the value of Chinese equities.

Traders are running out of places to hide in a nation where market declines have a habit of snowballing. Government bonds are offering little in the way of comfort, and even commodities are feeling the squeeze. Making matters worse is the prospect of seasonally tighter liquidity ahead of the Chinese New Year holiday, according Oanda Corp's Stephen Innes.

"People are aggressively taking profit," said Mr Innes, Asia-Pacific head of trading at Oanda in Singapore.

"They just want to unwind risk and take cash. The slide of Chinese equities in the past few days has definitely had an impact on the currency."

China's markets started the year strongly, with the onshore yuan gaining more than any other currency in Asia and the Shanghai Composite Index rising almost every session in January. Signs of overheating quickly popped up everywhere, as gauges tracking the country's energy stocks, financial firms and consumer staples all reached overbought levels last month. They've been among the hardest hit in the past four days.

Investors are continuing to flee risk around the world despite calls to buy the dip. The selloff is testing the resolve of China's "national team", as state-backed funds are called, to step in to keep markets stable. But signs of buying have been few and far between, with the Shanghai index set to suffer its first so-called correction in 743 days, the longest such streak in history. It dropped as much as 4.3 per cent on Friday.

Worse-than-expected trade surplus data finally broke the resilience of the yuan, which appeared to take on the surprising role of a haven asset this week. It was the world's worst-performing major currency on Thursday. The onshore yuan slipped another 0.1 per cent to 6.3270 per US dollar on Friday.

"It's a combination of factors including stronger dollar, the nervousness in the equity market and the heavy positioning accumulated earlier that's caused the decline," said Sim Moh Siong, a currency strategist at Bank of Singapore Ltd.

BLOOMBERG