To Wall Street’s disbelief, China’s financial markets are not doing so well as their stocks and bonds are heading into a bear market. Mainland equities such as the shares in Hong Kong just entered their first bear market and have seen the worst week since Trump’s trade war.
Even the assets, with power as strong as the country’s currency or the government bonds, are threatened by this credit-market contagion, with the yuan being volatile since August 2021. Some of the strongest, biggest property developers are facing such a situation for the first time in years.
While it’s still only January, mounting losses are testing the ability of policymakers in Beijing to support markets after the chief securities regulator vowed to “firmly” prevent volatility. It’s also confounding those on Wall Street who predicted easier policy out of Beijing would be the catalyst needed to revive Chinese beaten-down assets. Authorities have cut interest rates and pledged to do more to support the economy.
Support measures
Signs of Beijing’s unease over the equity market slump are showing up visible measures of support – from front-page articles in state media appealing for calm to some of China’s largest mutual funds publicly committing to buying their own equity-focused products. The country’s central bank has stepped up its liquidity injections in recent days to see lenders through the seasonal Lunar New Year cash crunch. More targeted intervention is possible as the Communist Party prioritizes stability before the Winter Olympics and in the final months of President Xi Jinping’s second term.
“Consensus is expecting that there will be support for the Chinese economy and markets – and for us that makes sense,” Paul Gambles, co-founder and managing partner of MBMG Group, told Bloomberg TV on Friday. “But making sense of Chinese markets? That’s a bit of a tough task. It’s a hard call for anyone.”
It can be dangerous to stay long in China for a holiday. In 2020 the country’s markets were shut as the Covid-19 pandemic spread from Wuhan – and the reopen was so brutal that more than 1,000 stocks had to be halted. It was similar in 2019 when a series of tweets from then-President Donald Trump signaled an escalation in the U.S.-China trade war. Mainland markets will be shut all of next week.
Reasons for caution
There are plenty of reasons for caution. China’s efforts to maintain its zero-Covid policy are coming under increasing strain. City-wide lockdowns may undermine consumer spending during the key holiday season. The slowdown in the property market, which makes up about a quarter of gross domestic output, is far from over. A rapid withdrawal of stimulus by some countries could also hurt China’s exports – a key driver of growth in the past two years.
Investors also remain vulnerable to the Communist Party’s opaque and unpredictable policymaking. Hopes that Beijing was nearing the end of a crackdown on the technology sector were dashed when China vowed to curb the influence of such companies in a sweeping communique on corruption. The optimism that Beijing was dialing back on its property crackdown has been replaced with skepticism. There’s still nervousness over the future of tutoring companies. A new nationwide campaign on money laundering has raised more uncertainty over where the government will strike next.
Wall Street’s optimism
Most of Wall Street is counting on a 2022 rally in China. Societe Generale SA, Goldman Sachs Group Inc., BlackRock Inc., UBS Group AG, and HSBC Holdings Plc have all turned overweight on Chinese equities. JPMorgan Chase & Co.’s Marko Kolanovic in December recommended going all-in on China this year, predicting the MSCI China Index would surge almost 40%. Morgan Stanley’s Jonathan Garner is the notable holdout, saying there may be more pain in store for Chinese shares.
On the credit front, firms including Allianz Global Investors, Axa Investment Managers, and Oaktree Capital Group have said in recent months that they’re looking to increase their holdings of Chinese real estate debt. Jason Brown, a former Goldman Sachs Group Inc. special situations group head, raised an initial $245 million last month for his Arkkan Capital to invest in Chinese distressed property loans and bonds.
Although the financial markets are going through some tough times right now, there is still enough time to convert into a bull market. MBMG Group’s Gambles said that from a policy perspective, China is quite distinct from the rest of the world. They will immediately take action in an efficient manner.
Thus, more boost in the liquidity of the equities is already expected from the central bank after it vowed to offer its monetary policy toolbox.
