There was no reprieve for Chinese equities on Friday.
Mainland shares stumbled again amid persistent fears that a brightening economic outlook and a seemingly imminent trade deal with the US will prompt Beijing to take a less aggressive approach to stimulus. Earlier this week, reports that the PBoC is on “pause” when it comes to additional RRR cuts and the subsequent decision to deploy targeted MLF seemingly underscored the notion that authorities are wary of resorting to broad-based liquidity injections at a time when the domestic equity market looks increasingly frothy.
Or at least it looked frothy until this week. Friday’s decline brings this week’s losses to 5.6% on the SHCOMP. From where I’m sitting, that looks like the third-worst week since the doldrums of January 2016.
Barring some kind of meltdown on Wall Street, this will be the worst week for Mainland equities versus the S&P in more than three years (top panel). It’s also the worst week for consumer discretionary names in China since January 2016.
On the trade front, talks will resume next week and are presumed to be in the final stretch. Overnight, SCMP confirmed Trump’s Thursday remarks that a state visit from President Xi may be in the cards.
“President Xi Jinping could meet his American counterpart in Washington as early as June if the two sides can finalize a deal to end the trade war”, SCMP said, citing a source familiar with the arrangements. “The source told the South China Morning Post that Xi was open to the idea of traveling to the US immediately after the two sides reached a deal, so that he and Trump could sign the pact face to face.”
Trump would like nothing better – photo ops are his thing, and you can be sure the White House will do everything in its power to play up what the president has described as the “grandaddy of them all” trade deal in the interest of boosting US stocks.
On Friday, Xi appeared to put his stamp of approval on the concessions China has made over the course of negotiating with the US. While addressing more than three-dozen world leaders at the Belt and Road forum in Beijing, Xi said this:
We will establish a binding enforcement system for international agreements [and] standardize all levels of government in terms of issuing administrative licenses and market regulation, and also eliminate improper rules, subsidies and practices that impede fair competition and distort the market.
[We] won’t engage in currency depreciation which harms other countries. [The yuan] will stay at a reasonable, equilibrium level.
There’s a lot to like about that if you’re the Trump administration, although critics will invariably say we’ve heard it all before.
The yuan rose for the first time in five sessions on Friday after a stronger-than-expected fix from the PBoC appeared designed to offset some of the pressure on the currency catalyzed by the dollar’s recent rally to YTD highs. The yuan fell to its weakest against the dollar in two months earlier this week, so Friday’s fix was generally seen as a sign that the PBoC is keen to avoid too much weakness at a critical juncture on multiple fronts.
The good news for anyone who’s still bullish on Mainland equities is that usually, A-share melt-ups get a lot more absurd than this year’s ~30% rally before gravity reasserts itself. With that in mind, we’ll leave you with the following quick take from Bloomberg’s Kyoungwha Kim:
This week’s painful correction in Chinese stocks is stoking fears that the market may have peaked already. Well, not really. Chinese bull market pattern [shows] the Shanghai Composite [has] tended to soar triple digits historically. [There’s] concern that China’s paring back stimulus is hurting investor sentiment as recent data showed signs of stabilization in the economy. But the PBOC’s supportive policies are likely to remain in place because the recovery may be rather bumpy. The scale of the previous rallies shows we are just having a hiccup before the nascent bull market roars away.