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Mainland shares in China dropped to a five-month low and dollar weakness remained topical as markets continued to ponder US inflation and the Fed’s reaction function.

Lingering angst in China’s property sector manifested in an aborted bond sale from Country Garden, undermining fragile sentiment. According to IFR, the developer failed to source sufficient demand for a prospective $300 million convertible note. Morgan Stanley and JPMorgan gauged interest for the deal, but it didn’t move forward, people familiar with the matter said.

That prompted a rout in the firm’s dollar bonds. The Hong Kong-listed shares plunged nearly 8% (figure below).

Not helping matters was a Bloomberg report which suggested banks are becoming more cautious about funding LGFV property projects.

“At least five state-run banks have imposed new restrictions this year,” the linked article said, citing sources and noting that “China’s biggest lenders are walking a fine line… encouraged by regulators to extend credit to stronger developers [but] under pressure to keep loan losses contained and avoid financing property firms and LGFVs that have borrowed excessively.” As ever, it’s a juggling act.

The slump in mainland benchmarks took the CSI 300 to a five-month low (figure below).

On net, foreign investors sold some $94 million worth of mainland shares Thursday. Apparently, not everyone is on board with Bridgewater’s call to get long Chinese bonds and hunt for “opportunities” in Chinese equities. Pure Alpha II managed just an 8% gain in 2021, and even that reportedly required a December stick save. (I digress.)

Ultimately, there’s just too much in the way of overhang in China, whether it’s the property slump, questions about the viability of the “COVID zero” strategy given the transmissibility of Omicron and subdued growth indicators. Earlier this week, a cooler-than-expected read on factory-gate inflation and a similarly benign CPI print bolstered the prospects for additional PBoC easing.

Meanwhile, the dollar is squarely on the back foot. Explanations abound, ranging from the notion that a hawkish Fed is already priced in to the idea that stronger growth globally will mean less demand for USD assets, especially given America’s ostensibly “weak” fiscal position and a less favorable backdrop for richly-valued US growth shares amid rising rates.

A more poignant take came from Bloomberg’s Vassilis Karamanis. “What really mattered for the currency market was real average hourly earnings falling 2.4% YoY last month,” Karamanis said, commenting on Wednesday’s economic data stateside. “Real disposable income for the US consumer keeps taking one hit after another and that’s why front-end rate differentials have failed to support the greenback for a month now.”


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