China’s high-flying big-cap stocks hit as PBOC raises borrowing costs

China’s big companies with elevated valuations are starting to feel the pinch from tightening liquidity.

The SSE 50 Index of the largest 50 companies on the Shanghai exchange slumped 1 per cent at the close on Thursday, capping the steepest decline in three weeks. The sell-off came after the People’s Bank of China raised the interest rate on seven-day reverse purchase agreements through the open market operation, following the overnight increase in borrowing costs by the Federal Reserve.

The big-cap companies are increasingly susceptible to the prospect of tightening liquidity after the valuation of the SSE 50 Index rose to its highest level in almost three years on the back of a 25 per cent rise in 2017. Citic Securities, the nation’s biggest listed brokerage, even predicts in a Thursday note that the central bank will probably raise the benchmark interest rate for the first time since 2011 as early as in the first half, as its global counterparts unwind the extra loose monetary policies and China’s economic recovery further gathers strength.

“Stocks with rich valuations will be the biggest victims of liquidity tightening and that’s the case for China’s big-cap companies now,” said Wang Zheng, chief investment officer at Jingxi Investment Management in Shanghai. “They rose too much last year and share-price increases far outpace earnings growth.”

Insurers and property developers topped the rank of the worst performers on the SSE 50 gauge on Thursday. New China Life Insurance tumbled 4.7 per cent to 47.18 yuan for a third straight day of declines, after reporting full-year earnings that trailed estimates this week. China Fortune Land Development slid 1.5 per cent to 34.07 yuan and Poly Real Estate Group dropped 2.8 per cent to 13.62 yuan on concern higher borrowing costs will deter homebuyers.

The ChiNext index of Shenzhen-listed smaller companies fared better, falling 0.7 per cent for the day, on relatively cheaper valuation. The gauge’s valuation dropped to the lowest level on record against the big-cap index last month, according to Bloomberg data.

“Looking forward, given the expectation that the Fed will continue to raise rates and the Chinese economy may remain stable, the PBOC is likely to further increase the rates of its reverse repo, medium-term lending facility and short-term lending facility and other tools,” said Zhu Chaoping, a global market strategist at JPMorgan Asset Management, in a note.