China stocks drop to lowest in seven weeks amid bond market turmoil

Hong Kong stocks also extend their losing streak to a fourth day to touch their lowest close in five months

PUBLISHED : Tuesday, 20 December, 2016, 9:28am
UPDATED : Tuesday, 20 December, 2016, 9:57pm

Chinese stocks slipped further on Tuesday to close at their worst level since early November, as continued turmoil in bond markets rattled investors after the People’s Bank of China signalled tighter control of banks’ high-yielding investment products to curb speculative credit growth.

Hong Kong stocks extended their losing streak too, dropping for a fourth day to touch their lowest close in five months.

The Shanghai Composite Index was down 0.5 per cent or 15.2 points to close at 3,102.88, the worst since November 2. The Shenzhen Composite Index dipped 0.1 per cent or 2.78 points to end the day at 1,981.32.

Among other major indices, the large-cap CSI300 finished down 0.6 per cent to 3,309.06, the Shenzhen Component gave up 0.4 per cent to 10,245.33, and the Nasdaq-style ChiNext Index inched lower by 0.1 per cent to 1,982.30.

We believe investor sentiment is particularly fragile at present, given that the liquidity strains are poised to drag on
Citic Securities analysts

Combined turnover for the Shanghai and Shenzhen markets continued to shrink, falling 4 per cent to 384 billion yuan compared with Monday.

In Hong Kong, the Hang Seng Index ended down 0.5 per cent or 103.62 points at 21,729.06, the lowest since July. The Hang Seng China Enterprises Index, known as the H-shares index, lost 1 per cent or 94.02 points to 9,283.41.

Turnover also decreased to HK$54 billion from Monday’s HK$56 billion.

Losses in stock markets came as the Chinese bond market witnessed another volatile session, with 10-year government bond futures for March delivery touching a record intraday low before bouncing back to close slightly higher.

The People’s Bank of China said Monday that it will incorporate off-balance-sheet wealth-management products (WMPs) into its Macro Prudential Assessment in the first quarter of next year, a move seen as a tightening of control over the shadow banking business in order to curb speculative credit growth.

“We believe investor sentiment is particularly fragile at present, given that the liquidity strains are poised to drag on,” said Ming Ming and Liu Bin, analysts for Citic Securities, in a note on Tuesday.

Wenli Zhao, an analyst for China Merchants Securities in Hong Kong, said the bond market has recently tumbled due to a domestic cash crunch, concerns about increased default risks, and the outlook for a faster pace of US rate increases.

“The bond rout has damped risk appetite for stock investors, who are cautious in making risky bets as liquidity tightens up and the yuan looks poised to depreciate further,” Zhao said.

He also expected both mainland and Hong Kong stocks to suffer from persisting capital outflow pressure in the near term as funds flow back into the US markets.

Su Peihai, an analyst at GuangZheng Hang Seng, said: “Investor sentiment will remain weak in Hong Kong and speculators are taking a wait-and-see attitude, reluctant to increase positions as the holiday season nears.”

Bank shares struggled after the PBOC’s plan to tighten control over WMPs, with Citic Bank falling 2.7 per cent to 6.45 yuan, China Merchants Bank down 1.2 per cent to 17.79 yuan, and China Construction Bank off 1.1 per cent at 5.33 yuan.

Steelmakers and oil shares were also weak, as Wuhan Iron & Steel declined 3.4 per cent to 3.37 yuan, Baoshan Iron & Steel dropped 3 per cent to 6.37 yuan, PetroChina shed 1 per cent to 7.62 yuan, and Sinopec moved 0.9 per cent lower to 5.47 yuan.

In Hong Kong, Sino-British banking giant HSBC Holdings declined 2 per cent to HK$62.5, after the company said it had finished a US$2.5 billion share buy-back programme.

Chinese financial shares also suffered, with Ping An Insurance falling 1.5 per cent to HK$39.15, and China Construction Bank down 0.9 per cent to HK$5.47.