Fri, Jan 15, 2016 - Page 14 News List

Bear market looming as PBOC fails to stop selloff

‘VERY, VERY FRAGILE’:The Shanghai Composite Index fell 2.8% as investors fled to government bonds, while the yuan dropped 0.5% despite a stable reference rate

Bloomberg

Lv Hai looks at a screen displaying a stock analysis software, fixed to the back of an electric bicycle, during a street stock salon in Shanghai, China, on Sept. 5 last year.

Photo: Reuters

Chinese stocks yesterday headed for a bear market, while government bond yields fell to a record as central bank cash injections and a stable yuan fixing failed to shore up confidence in the world’s second-largest economy.

The Shanghai Composite Index sank as much as 2.8 percent, falling more than 20 percent from its high last month and sinking below its closing low during the depths of a US$5 trillion rout in August last year.

Investors poured money into government bonds after the People’s Bank of China (PBOC) added the most cash through open-market operations since February last year, sending the yield on 10-year notes down to 2.7 percent.

While the central bank kept its yuan reference rate little changed for a fifth day, the currency dropped 0.5 percent in offshore trading and the Hong Kong dollar declined to its weakest since March last year.

The selloff is a setback for Chinese authorities, who have been intervening to support both stocks and the yuan after the worst start to a year for Chinese markets in at least two decades.

As policymakers in Beijing fight to prevent a vicious cycle of capital outflows and a weakening currency, the resulting financial-market volatility has undermined confidence in their ability to manage the deepest economic slowdown since 1990.

“You can’t really find buyers in this environment,” Citigroup Inc strategist Ken Peng (彭墾) said in Hong Kong. “It’s a very, very fragile status quo China is trying to maintain.”

The government faces a dilemma with the yuan, GF International Investment Management Ltd (廣發國際) trader Samuel Chan said.

On one hand, a weakening exchange rate would help boost exports and is arguably justified, given declines in other emerging-market currencies against the US dollar in recent months. The downside is that a depreciating yuan encourages capital outflows and makes it harder to keep domestic interest rates low.

The monetary authority “doesn’t want the yuan to depreciate fast because it will push funds to leave China very quickly,” Chan said.

The country saw capital outflows for 10 straight months through November last year, totaling US$843 billion, according to an estimate from Bloomberg Intelligence.

Meanwhile, foreign-exchange reserves sank by a record US$513 billion last year to US$3.33 trillion, according to the central bank.

Policymakers have had some recent success in supporting the yuan after the currency’s new year tumble rattled global markets. The PBOC has focused its efforts on the offshore Hong Kong market, soaking up the supply of yuan and pushing interbank borrowing rates for the currency to record highs earlier this week in an effort to deter bearish speculators.

The turbulence in Chinese markets is seeping into Hong Kong in other ways, too. The territory’s benchmark Hang Seng Index dropped 1.6 percent yesterday to the lowest level since September 2012, while the normally stable Hong Kong dollar is heading for its biggest decline since September 2011. The city’s economy also faces a weakening real-estate market and the prospect of capital outflows fueled by rising US interest rates.

“With the Hong Kong stock market declining and heightened worries over China’s economy and markets, I see further weakening of the Hong Kong dollar,” Mizuho Bank Ltd strategist Ken Cheung said in Hong Kong.

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