China's stocks, bonds, currency drop in unison before Congress

[HONG KONG] Caution is spreading through China's financial markets before the start of a crucial Communist Party gathering.

The Shanghai Composite Index fell for a second day and government bonds retreated, with the 10-year yield rising to a two-year high, while the yuan retreated 0.3 per cent against the dollar. With analysts expecting little in the way of substantial reforms to emerge from the twice-a-decade congress, which begins Wednesday, investors focused on comments from the chief of the central bank which suggested stronger action to cut corporate leverage.

Selling before the party meeting starts has been a successful strategy in the past - at least in terms of equities. The Shanghai Composite has dropped an average 3.3 per cent over the past three gatherings, and a further 3.3 per cent in the five trading days thereafter, according to data compiled by Bloomberg.

Mr Zhou's comments that Chinese firms have taken on too much debt have weighed on smaller companies in particular, with the ChiNext index tumbling 2.5 per cent in two days. The gauge of small-cap shares is in the red this year amid concern rising funding costs will hurt earnings. Still a deeper selloff is unlikely: The China Securities Regulatory Commission has ordered local brokerages to ensure stable markets before and during the congress, people familiar with the matter have said.

The Shanghai Composite Index fell 0.2 per cent at the close, while the 10-year yield rose four basis points to 3.75 per cent at 3.12 pm in Shanghai. The yuan fell the most this month to 6.6116 per dollar.

China's markets have had a pretty mixed year: stocks are up, but lagging far behind offshore traded counterparts; bonds have tumbled, with 10-year yields rising the most among major economies as officials moved to curb shadow banking; the yuan has climbed 5 per cent amid surging volatility. Bloomberg surveys showed market participants expect the nation's financial markets to be listless in the fourth quarter.

BLOOMBERG