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Of Bear Markets And Falling Knives: Chinese Stocks Not Impressed With Yuan Rebound

Sell on any strength.

Thankfully for regional risk, the PBOC engaged the yuan airbrake yesterday afternoon and at least for the time being, with the help of Chinese state-owned banks who were seen selling dollars to prop up the Chinese currency, is restoring a sense of calm in regional markets.

That’s from OANDA and while it’s certainly true that remarks from Yi Gang helped the yuan (which rebounded further on Wednesday), it apparently wasn’t enough to restore confidence in Chinese equities.

The Shanghai Composite fell for the second session this week, underscoring the “sell any strength” mentality that’s taken hold amid the plunge in the currency. The index is of course mired in a bear market and is sitting at its lowest levels since early 2016:

SHCOMP

Meanwhile, the tech-heavy ChiNext plunged more than 2.5% for its largest single-day loss in two weeks. As a reminder, it’s just off its lowest levels since January of 2015 (i.e., since before the Chinese equity bubble burst):

ChiNext

Not helping matters were comments from Sun Guofeng, director of the PBoC’s financial research institute, who, in China Finance magazine, said last month’s RRR cut isn’t an indication of a bias towards looser monetary policy.

Amusingly, UBS was out on Wednesday cutting their target on the CSI 300 to 4,050 from 4,450, a decision the bank says stems from “tighter onshore market liquidity as shown by rising credit spreads and defaults”.

I’d be more inclined to say the new target was motivated by reality setting in, because the previous target would have represented a retrace of the entirety of 2018’s losses, a prospect which seems a bit far-fetched at this juncture. Do note that the new target still reflects 20% upside from Wednesday’s close:

CSI300

Perhaps Dongguan Securities’ Fei Xiaoping summed it up best:

The stock market is extremely susceptible to mood swings and jumpy.

So who wants to catch a falling knife?

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2 comments on “Of Bear Markets And Falling Knives: Chinese Stocks Not Impressed With Yuan Rebound

  1. Error404

    They all do it, of course, but UBS has a particularly stellar record of adjusting forecasts once a big move has taken place – especially in FX. They might follow the old, “when the facts change, so does my opinion dear boy” line of argument. Others might see horses and stable doors.

  2. Guiness

    You mean I shouldn’t follow Google into JD? Now, how am I supposed to run my portfolio? Just google it!

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