Bloodbath In China: Overnight Stock Collapse Blamed On Bond Fears, Liquor

Ok, well it wouldn’t be entirely inaccurate to say that things fell apart in China overnight.

Just two days after surging nearly the most in three months, the CSI 300 fell the most since June of last year and the ChiNext plummeted 3% as well:

That’s the lowest close since August 25 from the ChiNext:

The SHCOMP wasn’t much better, falling 2.3%:

Part of the problem here is obviously the fear that Beijing’s push to rein in the shadow banking complex will end up choking off liquidity and exacerbating a bond selloff. They’ve been battling to keep 10Y yields below 4% this month and that’s a battle they’re just barely winning:

10-year government bond yields fell on Thursday after jumping 4 basis points in the previous session. Notably, the yield on similar-maturity China Development Bank bonds dipped 2bps. Policy bank yields have come under increased scrutiny this week after the spread between yields on China Development Bank’s April 2027s and 10Y government bond yields exploded 11bps on Wednesday, the most since December 2014. Those 2027s are yielding 5.02% – so that’s a quasi-sovereign yielding more than 5% for the first time in at least three years.

The PBoC injected 100b yuan today bringing this week’s total to 130b yuan – that’s an effort to allay liquidity concerns and it underscores the precarious nature of the tightrope walk.

“The bond yield is rising too fast and triggered worries in the market, reflecting how tight the liquidity supply is [so] investors rushed from bonds, triggering the rise in yields, which are negative for corporate profits as their financing costs will increase,” Castor Pang, head of research at Core-Pacific Yamaichi HK said, adding that this is “very bad news for the stock market [as] the impact of such a rapid bond yield increase is similar to that of an interest rate hike.”

In addition to the bond market jitters, people are apparently also worried about sorghum liquor maker Kweichow Moutai, which is the second-largest stock on the SSE 50. Xinhua News cautioned about the stock’s valuation on November 16 and it’s been a veritable bloodbath since:

Given its market weighting, Xinhua probably should have known better than to publicly question it, but alas. Here’s Bloomberg:

A week ago, the state-run Xinhua News Agency called out gains in Kweichow Moutai Co., the nation’s biggest liquor maker, saying it was rising too fast. Since then, the company — which produces China’s most iconic baijiu alcohol in the mountains of Guizhou province — has lost the equivalent of $16 billion in value, spurring a slump in other liquor and consumer shares.

Those losses melded Thursday with concerns about the bond market to trigger a widespread equity selloff: China’s large-cap SSE 50 Index sank the most since March last year.

Just to give you some perspective, have a look at this:

Of course as is the case for all risk assets this year, you have to keep these hiccups in perspective. “You can say this is a correction but I don’t think it’s a market meltdown,” Dickie Wong, executive director of research at Kingston Securities Ltd. in Hong Kong, said. “Market sentiment is still okay but after recent gains it’s time to pull back.”

The CSI 300 is still up 24% YTD even after today’s meltdown correction: