(Bloomberg) — China’s asset sell-off deepened on Wednesday, as a major equity gauge is set to erase all gains seen since last month’s Politburo meeting and the yuan slid toward a 16-year low.
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The MSCI China Index fell 1.3% amid growing concerns about economic growth, and is set to close below the level it was before policy pledges at the July political meeting sent a rally. The Hang Seng China Enterprises Index is on the verge of erasing its gains, while the Hang Seng Index fell 1.4%, closing in on a technical bear market.
Stress is building across China’s financial markets due to a slew of disappointing economic data, renewed concerns about the real estate sector and the unfolding crisis in the country’s shadow banking system. All of this creates deflationary pressures that threaten to undermine corporate earnings. Investors are calling for more aggressive easing from Beijing as additional policies have so far failed to revive confidence.
“The current recession-like conditions in China, characterized by deflationary pressures, have significant implications for its domestic economy and global interaction,” said Manish Bhargava, fund manager at Straits Investment Holdings in Singapore. “Investors may be wary of allocating money to China due to concerns about economic downturn and lower potential returns.”
The market’s reaction to a series of stimulus steps has been muted, highlighting how pessimistic investors are. The sell-off continued following a report on Wednesday that authorities had ordered some investment funds this week to avoid being net sellers of shares. The sudden interest rate cut by the People’s Bank of China on Tuesday and a possible reduction in stamp duty on stock trading also failed to affect the situation.
Today’s price action was “another classic day” for Chinese stocks, said Wheeler Chen, senior analyst at Forsyth Parr Asia Ltd. Despite the supportive measures, “people are starting to lose patience. Only by following piecemeal policies, they are getting more and more worried about the economy.”
Foreign investors once again unloaded Chinese stocks via links with Hong Kong, extending the series of net selling into the eighth session.
In the currency market, the People’s Bank of China moved again on Wednesday to boost fragile sentiment with a stronger-than-expected yuan reference rate and the largest short-term injection of cash into the financial system since February. The measures came as the land unit fell to its weakest level since 2007 against the dollar.
The central bank is charged with keeping the currency stable while trying to boost the economy – two ambitions that can often be in conflict. A weaker yuan may make Chinese assets less attractive to foreign investors, while local companies may be reluctant to convert foreign currencies into the yuan due to the large yield differential with markets such as the United States.
China’s economic growth prospects are bleak, as investment banks around the world cut their forecasts for 2023. JPMorgan Chase & Co. His forecast for the full year was down to 4.8%. Most recently in early May, the bank was expecting an expansion of 6.4%, among the highest demands.
Sentiment was hit further as the latest data showed home prices fell again in July. The real estate sector turmoil has been at the heart of China’s economic woes due to its importance to growth and its implications for household wealth and the financial system.
“The negative sentiment for China is reverberating in the markets, and the rate cut by the People’s Bank of China has again suggested that calls for massive stimulus may be misplaced,” said Charo Chanana, market analyst at Saxo Capital Markets.
– With the assistance of Abhishek Vishnu and Ishika Mukerji.
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