Mainland Chinese shares came off holiday and promptly plunged.
This was predictable given losses in Hong Kong shares last week and considering everything mainland markets had to price in to get caught up.
Over the last several days, tensions between Washington and Beijing were ratcheted up further following Bloomberg’s blockbuster “tiny spy chip” exposé and Mike Pence’s contention that China is meddling in U.S. elections, an allegation Beijing called “ridiculous”. Pence, China says, should avoid spreading “malicious slander”. On top of all that, naval tensions are running high in the South China Sea.
Over the weekend, China delivered another RRR cut, and the PBoC’s efforts to downplay the likely read-through for the yuan notwithstanding, more than a few folks see that for what it is: A move that widens the policy divergence with the U.S. and thereby points to yuan depreciation.
Chinese large caps, as measured by the FTSE China A50 index, plunged a truly harrowing 4.8%, the most since January of 2016 when global risk assets were in a tailspin amid deflation fears.
Apparently, selling on the Northbound link was huge on Monday, suggesting foreign appetite for A-shares has slammed into reverse despite ostensibly attractive valuations.
(Goldman)
If you look at a day chart, there was no sign of the National Team in afternoon trading and you can bet that soured sentiment even further given expectations that state-backed buying would likely become a fixture of the market again.
Last month, Deutsche Bank cited valuations among four factors that could compel state actors to intervene in mainland equity markets amid the ongoing malaise. As a reminder, here are those factors:
We believe it is becoming increasingly likely that the National Team will intervene this time since: 1) the Shanghai Composite Index is now very close to the key psychological level of 2,638; 2) valuations are turning more attractive than when the index bottomed in Feb16; 3) the latest announcement of USD200bn in tariffs by the US administration; 4) low interbank borrowing costs that the National Team can leverage to strengthen its balance sheet.
I suppose one could argue that the RRR cut should have stabilized market sentiment coming off the holiday, but there was just too much to price in for that to carry the day, especially given how much of the newly free liquidity will be soaked up by MLF repayments.
As far as the onshore yuan goes, it fell through 6.90 on Monday for the first time since August, in a testament to the notion that barring aggressive use of the CCAF or overt intervention, a 7-handle may be in the cards.
It’s worth noting that Beijing has exhausted at least some of the levers at its disposal when it comes to arresting currency weakness. In August (the last time dollar-yuan looked liked it might push through a 7-handle), the PBoC moved in to slam on the brakes. Specifically, they reinstated forwards rules (August 3), chided onshore banks for selling RMB (August 7), moved to squeeze offshore liquidity (August 16), and reinstated the counter-cyclical adjustment factor (August 24).
Going forward, the question is whether and to what extent Beijing views further “market”-based yuan depreciation as acceptable given that more currency weakness will help cushion the blow from the U.S. tariffs.
