China asset-bubble warning threatens stock frenzy in HK

Beijing

A CHILL swept through Chinese financial markets after the central bank withdrew cash from the banking system and an official warned about asset bubbles.

The People's Bank of China (PBOC) drained about US$12 billion via open-market operations on Tuesday. The decision was unusual in the weeks before the Chinese New Year holiday, which falls in mid-February this year, because residents typically need more cash to pay for seasonal travel and gifts. It also went against recent reports in Chinese newspapers that liquidity would not be tightened before the holidays.

While Tuesday's withdrawal was small in isolation, it added to signs that Beijing is growing wary of how cheap and plentiful liquidity has stoked excess in markets.

PBOC adviser Ma Jun told local reporters that risks of asset bubbles - such as in the stock or property market - will remain if China does not shift its focus toward job growth and inflation management instead.

The reaction was particularly brutal in Hong Kong's stock market, where onshore funds were helping underpin a world-beating rally. Mainland investors bought a net HK$250 billion (S$42.5 billion) worth of Hong Kong stocks this year through Monday, nearly 40 per cent of last year's total, and were buyers again on Tuesday.

The Hang Seng Index slid as much as 2.7 per cent from its highest level since June 2018, led by a 6.7 per cent plunge in Tencent Holdings Ltd. In mainland markets, a gauge of interbank borrowing costs jumped 32 basis points to 2.74 per cent on Tuesday, the highest level in a year. Futures on Chinese government bonds due in a decade were poised for the biggest decline since September, while the CSI 300 Index of shares in Shanghai and Shenzhen, which has been approaching 2007's record high, fell as much as 2.1 per cent.

Xing Zhaopeng, an economist at Australia & New Zealand Banking Group, said: "The PBOC wants to bring investors out of the euphoria caused by abundant liquidity in December. The PBOC is unlikely to loosen its purse strings at least this week, which will make cross-month liquidity very tight."

PBOC governor Yi Gang on Monday said the central bank will seek to support economic growth while limiting risks to the financial system - a continuation of its existing policy stance. He said China's total debt-to-output ratio climbed to around 280 per cent in late 2020.

Tencent's drop came after the stock surged 11 per cent on Monday, its best day since 2011, to approach a trillion-dollar market value. BLOOMBERG