You are here
China's stocks, bonds, yuan are a triple losing bet this month
[BEIJING] For the first time in two years, China's stocks, bonds and currency are all a losing proposition.
The Shanghai Composite Index has dropped 2.2 per cent in April to a one-month low, the yuan is down 0.4 per cent versus the dollar, while government and corporate bonds have tumbled, with the five-year sovereign yield rising 27 basis points.
Even a sudden revival in the nation's commodities markets is looking fragile after frenzied speculation prompted exchanges to take measures to cool trading.
The declines mark a reversal from March, when the benchmark equities gauge jumped 12 per cent and the yuan rallied the most since 2010 as new credit surged.
Improving data from industrial output to retail sales have led traders to pare back bets for more stimulus, while rising credit defaults are fueling the biggest selloff in junk debt since the data became available in 2014.
Deutsche Bank AG is one bull looking to reduce holdings of Chinese stocks on bets the economy will fail to reach the government's growth targets and yuan declines will accelerate.
"Clearly there was a turn in China," said Sean Taylor, chief investment officer for Asia Pacific for Deutsche Bank's wealth-management unit in Hong Kong. "You've seen money in the A-share market going to property and commodities. We've been adding risk in the last few months and coming into the summer, we will take it away and wait for opportunities to add again. We are not yet ready for China's structural story because earnings haven't come through."
Investor interest in the world's second-largest equity market is waning, with turnover on the Shanghai Stock Exchange falling to levels last seen regularly in 2014 and a gauge of volatility dropping to a 12-month low.
Investments in stock-market funds fell by 89 billion yuan (S$18.47 billion) in April, according to data from Shanghai-based research firm Z-Ben Advisors.
First-quarter earnings aren't proving much of a draw. Of the 171 Shanghai-listed companies that have reported three-month figures and are tracked by Bloomberg, 57 per cent have missed analyst expectations. PetroChina Co, the biggest weighting on the benchmark gauge, posted its first quarterly loss since the company listed in 2000, while China Life Insurance Co reported a 57 per cent drop in net income.
The bond market is also looking shakier than at the start of the month. The five-year government yield has increased from a six-year low of 2.47 per cent on April 1, while the Bank of America Merrill Lynch China Broad Market Index of total returns on yuan-denominated debt has declined 1 per cent from a record high on April 4.
Government bonds are coming under pressure as inflation increased to the highest since mid-2014, while corporate notes are slumping amid a spate of defaults and a surprise move by state-owned China Railway Materials Co to halt its bond trading this month because of what the company called "repayment issues."
"We will definitely see more defaults and difficulties for corporates in issuing new bonds," said David Gaud, who helps oversee US$61 billion as a fund manager at Edmond de Rothschild Asset Management in Hong Kong.
"Credit costs will go up and credit spreads will widen. Your return is too low for your risk in China."
At least 103 Chinese firms postponed or scrapped 117.4 billion yuan of planned note sales this month through April 25. The yield premium on three-year AA-rated local bonds, considered junk in China, over government debt widened 43 basis points in April, the most since 2014.
Deutsche Bank's Mr Taylor forecasts China's economy will grow 6 per cent this year, below the government's target range of 6.5 per cent to 7 per cent, and targets the yuan to fall to 6.9 a dollar by the end of the year - implying a 6.1 per cent drop from Thursday's level.
The onshore currency was 0.1 per cent higher at 6.4740 per dollar on Thursday, after a plunge in the dollar late Thursday prompted the central bank to strengthen the fixing by the most since a peg was dismantled in 2005.
A Bloomberg replica of the CFETS RMB Index, which measures the yuan against 13 exchange rates, dropped 0.2 per cent to a 17-month low, defying government pledges of "stability" against the basket.
"All markets are looking a little tired" after a good run in March, said Andrew Clarke, Hong Kong-based director of trading at Mirabaud Asia Ltd. "People are taking money off the table at all asset classes. We don't need to speculate for now."
One area where speculation has been evident is the commodities market, where trading spikes prompted exchanges in Shanghai, Dalian and Zhengzhou to boost fees or issue warnings to investors.
The equivalent of 41 million bales of cotton traded in a single day on the Zhengzhou Commodity Exchange last week, the most in more than five years, while daily volumes of iron ore futures exceeded annual imports, according to Goldman Sachs Group Inc.
Speculators now appear to be retreating. The value of futures traded across the nation's three biggest commodity exchanges has shrunk 42 per cent since investors spent 1.7 trillion yuan last Thursday on everything from steel bars to eggs.
"They just got out of hand," said Mr Clarke. "People are looking for different markets to play at the expense of the equity market. If people start to lose on margins, the same as when they lost money in the stock market, the impact will be on the property, equity or bond markets where they have to liquidate to make up for losses in commodities."