Traders hold their breath as Chinese markets reopen after the holidays
(Bloomberg) – Chinese financial markets are expected to open for the first time in a week on Friday, as investors brace themselves for the volatility of a surprise property default coupled with the global energy shortage.
The Golden Week holiday offered a rare respite from a months-long regulatory attack that sent shockwaves through global financial markets. As trading resumes, the focus will be on where Beijing strikes next and the impact of Fantasia Holdings Group Co.’s dollar bond default this week, the first in the industry since the China Evergrande group has sunk deeper into the crisis.
There will be keen interest in how the People’s Bank of China can maintain sufficient liquidity given the wall of short-term debt owed this month. About 340 billion yuan ($ 53 billion) of 14-day repurchase agreements will expire on Friday when onshore markets reopen.
Chinese equities listed in Hong Kong are down around 0.2% since the onshore markets were last traded. On Wednesday, they fell to levels not seen since the Chinese stock market bubble burst in 2016, before rebounding on Thursday. The offshore yuan has changed little.
Chinese investor sentiment “has recently recovered to a neutral level, but the trend is resolutely downward and the upside is limited by recent domestic default stories,” said Olivier d’Assier, head of applied research APAC at Qontigo. “The main issues affecting sentiment have so far been purely domestic, but on the geopolitical front, the US-China trade talks have yet to take place and this issue remains unresolved.”
Relations with the United States are under the microscope following news that President Joe Biden plans to meet with Xi Jinping virtually by the end of the year. U.S. Trade Representative Katherine Tai is also expected to meet with Deputy Prime Minister Liu He in the coming days, with the two countries still at odds over China’s commitments in the January 2020 trade deal.
Here’s what to watch out for when resuming activities:
Stocks in Hong Kong were volatile as the mainland was absent. A massive sell-off of tech names sent the Hang Seng tech index to record lows on Wednesday before recovering on Thursday. Health technology stocks like JD Health International Inc. and Alibaba Health Information Technology Ltd. were among the names that fell, while other large-cap names like Tencent Holdings Ltd. and Meituan posted five straight days of losses before Thursday’s recovery.
Real estate investors were also spooked after Fantasia defaulted on a dollar bond. Chinese real estate stocks such as Sunac China Holdings Ltd. and China Aoyuan Group Ltd. both recorded falls of more than 10% on Tuesday, as fears grew over heavily indebted developers.
“There might be a bit of fear of what’s going on, of the contagion effect,” said Jun Bei Liu, portfolio manager at Tribeca Investment Partners. She expects markets to be “stable or moderately positive”, with some weakness in the real estate sector.
Surprise default in China deepens Evergrande contagion fears
Credit and change
Fantasia’s non-payment and Evergrande’s uncertainty caused a sell-off in China’s offshore debt market. The wild swings in bonds were accentuated by the low liquidity during the holidays.
Traders are watching to see if the return to desks in mainland China may have a stabilizing influence, as investors digest growing default risks in the debt-laden sector. Onshore AA-rated Chinese corporate bonds, which are considered garbage on the mainland, will remain in the spotlight. A further widening of their public debt spreads could bring the spread to its largest level within a year or so.
The onshore yuan, which has traded in a range just above 1% since July, could stay in that range in the short term as there was little activity in the offshore counterparty during the weeklong vacation. However, a gauge that tracks the Chinese currency against 24 peers is around the highest level since early 2016.
In addition to the repurchase agreements maturing on Friday the following week, 500 billion yuan in repurchase agreements and an additional 500 billion yuan from a medium-term loan facility are also expected to expire.
The central bank has added 790 billion yuan net through open market operations since September 17 in 10 consecutive injections. This is the longest short-term funding chain since August 2020, when the PBOC increased liquidity in the financial system for 13 days.
Overnight interbank funding costs climbed 78 basis points to 2.27% on September 30, the biggest intraday jump since January. The cash flow crunch was spurred by higher demand from banks at the end of the quarter for regulatory checks and tax payments, with weeklong vacations exacerbating the problem.
PBOC Governor Yi Gang is expected to speak Thursday at 7 p.m. Hong Kong time, which could provide more information on the central bank’s thinking.
Commodities traders will be eager to catch up after a hectic week for materials and energy.
Thermal coal will trade after closing near an all-time high on the Zhengzhou Commodity Exchange last week. Since then, more and more details of China’s plans to increase supply at any cost have been released, India’s fuel shortage has deepened, and alternative natural gas markets have collapsed in the middle. European shortages and Russian promises to help stabilize markets.
Crude traders will be keeping a close watch on fuel oil on the Shanghai Futures Exchange to see how the natural gas turmoil is affecting the commodity. Asian buyers are paying top dollar for a variety of fuels as they seek alternatives to increasingly expensive gas.
Metals traders will prepare for volatility with the reopening of markets for steel, iron ore, copper and others, with a focus on how electricity shortages in the country will affect both production and consumption of materials.
Palm oil and soybean meal could experience abrupt changes, with China’s energy crisis severely affecting the processing industry. Several soybean crushing plants have been forced to close, resulting in continued decline in soybean meal stocks that have pushed up feed prices. Palm oil futures in Kuala Lumpur hit a record high as China was absent.
Investors will also be closely monitoring holiday retail and consumption data to gauge the strength of the economy and the market’s ongoing recovery from the coronavirus outbreaks. The number of trips made on China’s road, rail and other transportation networks on Tuesday was 34% below 2019 levels, according to the transportation ministry.
The news is better for theaters, with movie ticket sales in the first five days at 3 billion yuan from 2.7 billion yuan in 2020, according to ticketing company Maoyan. In a note released Monday, Citigroup Inc. said box office sales in the first three days of the holiday were better than expected, although total sales likely tend to be below the 2019 record.
Meanwhile, consumer goods such as Moutai liqueur and pu-er tea are the focus of attention after Beijing on Tuesday banned loans for speculation in certain luxury consumer goods in an attempt to prevent “the disorderly expansion of capital “. Kweichow Moutai Co., China’s most valuable stock and producer of high-end baijiu, has been working to make it easier for regulators to control distributor bottle hoarding and rising prices.
© 2021 Bloomberg LP