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Beijing authorities have the tools to handle headwinds caused by China bears, say analysts

Sharp falls in Hong Kong and Japan last week presage gloomy start to Year of the Monkey for mainland China markets

PUBLISHED : Sunday, 14 February, 2016, 6:15pm
UPDATED : Sunday, 14 February, 2016, 6:15pm

The authorities in Beijing still have enough ammunition to fight back against aggressive China bears, analysts say.

But they say the central bank and other authorities will need to do more as mainland China faces more headwinds from the stock and currency markets when both markets reopen on Monday after the Lunar New Year holidays.

Aidan Yao, senior emerging Asia economist at AXA Investment Managers, said the mainland still enjoyed a trade surplus and had a foreign reserve pool that dwarfed all other economies, giving the People’s Bank of China (PBOC) enough ammunition to ward off speculators.

“It is common knowledge that the yuan is overvalued, and China needs more monetary easing to cushion the economy, which inevitably brings along currency devaluation,” he said. “But the bottom line is the PBOC will not let the short sellers turn the offshore yuan market into their playground.”

Kay Van Petersen, Saxo Capital Markets’ Asia macro strategist, said: “At the end of the day, you do not have many tools to short China. Many people bearish on China are actually making short bets on the currency of its major trading partners like South Korea and Taiwan.”

Official figures shows China’s trade surplus grew 56.7 per cent year on year in 2015 to US$562 billion. Its foreign reserves stood at US$3.33 trillion at the end of last year, and US$3.23 trillion at the end of last month.

The sharp falls in the Hong Kong and Japanese markets last week – with the Hong Kong market down more than 5 per cent at one stage on Thursday in its worst Lunar New Year debut since 1994 after the Japanese market fell 5 per cent on Tuesday – has led analysts to predict the mainland markets will open lower after the one-week holiday.

China will continue easing to resuscitate the property bubble, while imposing some forms of capital control to contain the yuan’s depreciation pressured by the easing
Hong Hao, Bocom International

Meanwhile, currency short sellers have not given up betting on a weaker yuan, and economists said China would have to let the yuan depreciate go unwind the pressure of overvaluation as global central banks, except for the US, loosen their purse strings in the face of economic slowdowns.

Offshore yuan shot up to two-month high in the Hong Kong market on Thursday to trade at 6.5390, the strongest level since December 15. The currency fell to a three-week low of 6.6276 against the US dollar on February 2, after the Bank of Japan took global investors by surprise at the end of last month when it announced the introduction of negative interest rates.

The turnaround in the offshore yuan came after traders said the PBOC had intervened in the offshore market and injected liquidity into the market on February 8 – Lunar New Year’s day. The central bank also set the guiding mid-price fixing at a one-month high before the Lunar New Year break.

The Beijing authorities had been sending “stable” signals since mid-January, traders said, lifting the offshore yuan from a five-year low after an earlier attempt to actively weaken the yuan sparked panicked selling.

However, traders said they still see yuan options being more bearish in Hong Kong this week. Billionaire investor George Soros, who made billions of US dollars shorting the British pound and yen, said last month a hard landing for China was “practically unavoidable” and he had been betting against Asian currencies.

The Wall Street Journal later reported that top hedge fund names, including Kyle Bass, who runs Hayman Capital, had placed heavy bets that China would eventually be forced to let the currency fall sharply.

The Communist Party mouthpiece People’s Daily and state news agency Xinhua have been lashing back against bearish comments about the Chinese economy, and warning that short sellers targeting China’s capital markets “would never succeed”.

The mainland’s economic growth slowed to 6.9 per cent last year, the slowest pace in 25 years, and the Caixin manufacturing purchasing managers index (PMI) was under 50 for the 11th month in a row in January, indicating a manufacturing sector in contraction. However, the Caixin service PMI has been on the rise for six months and hit 52.4 in January.

On February 2, the PBOC allowed commercial banks to cut mortgage deposit requirements to an historic low. But Hong Hao, chief strategist at Bocom International, said the move could not revive growth in a saturated property market and was instead an alert that China’s asset bubbles were caving in, foreshadowing an “inexorable bearish trend on stock markets”.

China’s A-share stock market had its worst monthly performance in history in January, as investors priced in a bumpy landing for the economy. And although the mainland stock markets seemed to have stabilised at a lower level early this month after the benchmark Shanghai Composite Index breached the 2,700 level, many investors have not seen buying opportunities emerge.

“China will continue easing to resuscitate the property bubble, while imposing some forms of capital control to contain the yuan’s depreciation pressured by the easing,” Hong said. “Eventually, something, or everything has to give. It is the risk China and the world must tread carefully.”

Goldman Sachs analysts advised investors trading China shares to maintain a “defensive orientation” in the near term, although “long-term value is emerging if global recession/China hard landing is not one’s base case”.

“It is a challenging market environment where risk appetite is driven by many global and domestic macro factors, and is extremely difficult to gauge,” they wrote in a research note late last month.

The Shanghai Composite Index tumbled more than 22 per cent in January, hitting a 13-month low at 2,638.30, and wiping out all the gains made during a leverage-based bull run last year.