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As The Condemned Awaits The Hangman, Mainland Markets In China Brace For Rout

Gallows humor.

By almost all accounts and indications, mainland Chinese markets are going to reopen to what, at least initially, will look and feel like indiscriminate selling.

Asian markets were besieged last week coming off the holiday, as the coronavirus spread and the mainland death toll mounted, stoking fears of a SARS repeat and undercutting the case for a rebound in global growth.

The KOSPI suffered its worst weekly decline since October 2018, the Hang Seng was crushed, and shares in Taiwan fell 5.8% in a single session on Thursday.

Read more: It Wasn’t Priced In: Taiwan’s Epic Tumble Prompts Asia Rout As Yuan Breaches 7

In short, there’s a lot of catching up to do, and one certainly imagines China’s notoriously fickle retail investors will be keen to hit the exits. That may very well necessitate state buying via the vaunted “national team”.

What we know right now is that FTSE China A50 Index futures are down in excess of 7% since the mainland has been closed.

Meanwhile, the Harvest CSI 300 China A-Shares ETF is coming off its worst week since Vol-pocalypse.

“The sell-off may be indiscriminate”, SocGen’s Head of Asia Equity Strategy Frank Benzimra said Friday, adding that “on the US-listed market, Chinese internet companies exposed to online retail (BABA, PDD) have only marginally outperformed names related to tourism (trip.com) or education (TAL)”.

Benzimra went on to say that cyclical sectors “are naturally more at risk than defensive sectors, notably the health care industry which understandably has seen a less pronounced sell off [while] the recent small cap outperformance is at risk of being interrupted, not only because of liquidity risk in a correction, but also because any ‘national’ intervention to support the market has traditionally been directed at large banks and SOEs”.

(SocGen)

If the Shanghai Composite drops more than 2.8%, it will mark the worst start to a Lunar New Year in two decades, which is fitting, because January 23’s selloff was the worst end to a Lunar Year in history.

The offshore yuan fell through 7 again last week. It’s down some 1% since the mainland market closed for the holiday and the PBoC will be watched closely for guidance.

We’re now a long way from the last onshore quotes from January 23.

The central bank said Saturday it would keep liquidity “reasonably abundant” and that banks can trim interest rates for areas affected by the virus. The chairman of the China Banking and Insurance Regulatory Commission echoed calls for lowering rates and slashing fees in a bid to – I don’t know, really – drown the virus in bank loans?

Thanks to the necessity of adding some 600 billion yuan in funding that would have matured Friday to Monday’s maturities, the PBoC will need to decide how much to roll out of a total 1.05 trillion that matures on February 3.

An early OMO cut would probably help sentiment quite a bit. Slashing the MLF rate would pave the way for a lower LPR later this month, when the first signs of the virus’s impact on the economy should start to become apparent.

Over the weekend, Li Chao, vice chairman of China’s securities regulator, told brokerages they should advise investors to “rationally and objectively” consider the impact of the virus, before making any decisions.

Suffice to say “rationality and objectivity” are not the hallmarks of Chinese retail investors.


 

3 comments on “As The Condemned Awaits The Hangman, Mainland Markets In China Brace For Rout

  1. H-Man, If China goes low on Sunday, it could be a blood bath. The body count from the virus is climbing on whatever metric you want to use. The initial calls were 12,000 infected by this Tuesday, based upon what is happening that number is going over the top on Sunday. That means a wildfire, assuming you rely on those stats.

    • I’ll be watching “Bloomberg Daybreak: Asia” this afternoon. I expect more action than the Super Bowl, and I can watch the commercials anytime.

      • Yeah, and that’s even more fun to watch now because David Ingles and some of the Hong Kong folk are reporting live from their living rooms (literally) because BBG told the Hong Kong staff to work from home last week. Not sure if that’s changing this week, though.

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