Emerging Stocks Drop on Greece as China Plunges Into Bear Market

29 Jun 2015 | Author: | No comments yet »

A Shortage of Tools for Betting Against China.

Emerging-market stocks sank the most since December and currencies weakened as concern mounted that a Greek exit from the euro area will reduce demand for riskier assets in developing nations. OTTAWA — If for only a few minutes, try to forget about Greece — as many would surely want to — and spare a thought for another possible trouble spot: China.

Chinese stocks tumbled, sending the benchmark index into a bear market, as signs of an exodus by leveraged investors overshadowed the central bank’s effort to revive confidence with an interest-rate cut.Sky-high stock valuations make the mainland A-shares market appear ripe for short selling, in which investors sell borrowed shares in hopes of buying them back later at a lower price and pocketing the difference.

A Chinese investor observes stock prices at a stock exchange hall on June 26, 2015 in Fuyang, Anhui province of China. (Photo by ChinaFotoPress/Getty Images) The once red-hot Chinese stock market is now icy cold, as another big selloff Monday tipped the mainland China’s main stock index officially into bear-market territory. It is known as China’s Silicon Valley and it is home to the world’s hottest stock market rally — a rally analysts worry is in the process of becoming undone. Even after Chinese shares’ precipitous two-week selloff, which continued on Monday, the benchmark Shanghai Composite Index stands at nearly twice its level of a year ago.

The fall means stocks in China have tumbled by almost 22pc from a June 12 high of 5,166, taking the index into bear market territory – loosely defined as a 20pc decline from a recent peak. Until last week, stocks on its tech-heavy stock exchange had surged more than 100 per cent this year alone, easily making it the best-performing stock market in the world.

The valuations have caught the attention of global hedge funds and other investors that were reluctant to invest in China after a trading link between Hong Kong and Shanghai opened last year. But it’s also not been keeping pace with the expansion that the world had been counting on as an anchor — while U.S. and European recoveries get back on course.

The retreat marks an end to the nation’s longest-ever bull market, a rally that’s lured record numbers of individual investors and convinced traders to bet an unprecedented amount of borrowed money on further gains. Today’s losses came amid global market turbulence due to breakdown in bailout talks between Greece and its creditors, which led to Greece shuttering its banks and stock market for the week. The lesson from China’s last equity bubble is that, once sentiment has soured, policy interventions aimed at shoring up prices have only a short-lived effect,” said Mark Williams, chief Asia economist at Capital Economics.

Greece imposed capital controls to avert a collapse of its financial system and shuttered the stock market and banks at least until July 6, the day after Greeks vote in a referendum on proposals to restore bailout aid. The country’s central bank lowered the main lending level on Saturday by 0.25 points, to 4.85 per cent, saying the move would “support rural, agricultural and small businesses.” “Is China’s economy in for a hard landing if equity valuations truly plunge? China’s interest-rate cut, along with assurances from the securities regulator that risks from margin trading are controllable, failed to ease concern that speculators are unwinding their positions. “Nobody knows when the market will bottom,” said Paul Chan, the Hong Kong-based chief investment officer for Asia ex-Japan at Invesco Ltd. “The unwinding of margin financing makes it very difficult to forecast what the fair valuation is.” The losses spread to Hong Kong, with the benchmark Hang Seng Index sinking 2.6 percent, while Hong Kong’s Hang Seng China Enterprises Index slid 3 percent. The European Central Bank on Sunday froze the ceiling on emergency funding for Greek banks after talks to extend the rescue collapsed before a deadline for the Balkan nation to pay about $1.7 billion to the International Monetary Fund. “It is not just the default, but also the increased probability of the exit of Greece out of the euro zone,” Michael Ganske, the head of emerging markets at Rogge Global Partners in London, said by e-mail. “The process would be messy as there is no blueprint for it.

That’s tough to believe, even if your average newswire writer has screamed at you to do so for many years and for a variety of shifting reasons,” said Derek Holt, vice-president of Scotiabank Economics. “First it was because of property markets and ghost cities. Today’s tumble was especially disquieting given that over the weekend, the Chinese government cut both interest rates and the reserve requirement ratio for banks.

Zhang Gang, a strategist at Central China Securities strategist in Shanghai, called Monday’s losses “panic selling” that will likely continue as margin investors are forced to liquidate their holdings and the recent selloff spurs more mutual fund redemptions. But the ones that are easily traded limit investors to a broad negative wager on big Chinese companies, not the stock- or sector-specific bets that many managers favor. “If you want to go short on A-shares, it’s very difficult,” said Kinger Lau, chief China strategist for Goldman Sachs Group Inc. Mr Williams said there was “plenty of room” for China’s central bank to cut rates further, although he said policymakers may delay further easing until the scale of the downturn was clearer. “The 12 month lending rate stands at 4.85pc and the 12m deposit rate at 2pc, each having been cut by 25 basis points. For emerging markets, I would expect central and eastern Europe to come under pressure the most due to regional proximity and trade links.” The Greek crisis and concern the Chinese stock rally has run too far have pushed the MSCI developing-nation index to erase most of its gains this year. While the loosening in the last few months has arguably been geared toward revving up the sputtering economy, the latest moves are likely direct responses to the swooning stock market, says Tom Orlik, an economist at Bloomberg. “Amped-up stimulus suggests the central bank is concerned that a tumbling equity market could snuff out the recovery in the real economy,” wrote Orlik in a note. “The equity market correction risked hitting consumer confidence, company fundraising, and value added from the financial sector.” What overpowered such aggressive freeing up of cash?

But People’s Bank [of China] officials may baulk at expending too much monetary policy ammunition in an effort to support markets, particularly if the spillover from a market slump to the economy outside the financial sector is limited.” A semi-annual audit of listed companies forced firms to sell stocks in order to restore their balance sheets, Anne Stevenson-Yang, head of J Capital Research, told the South China Morning Post (paywall). Margin calls this morning on the off-market HOMS pooling system were only about 2.2 billion yuan, a “fraction” of total transaction value, the China Securities Regulatory Commission said in a statement Monday. For decades, developed nations have been hectoring the Chinese to stop hoarding their cash and start spending more to help rebalance the country’s heavily tilted export-and-investment economy.

That has amplified the magnitude and the speed of the rally.” Proponents of short selling, which in the U.S. is often the domain of hedge funds, say it helps uncover overvalued stocks and takes some of the froth out of markets. The recent declines have been driven by fears of overvaluation, a slowing Chinese economy and concerns that Chinese authorities will crack down on buying stocks with borrowed cash to tame euphoria.

Chinese regulators are considering suspending initial public offerings to stabilize the country’s tumbling stock markets, people familiar with the matter said. A weaker China would have a negative impact not just on Asia but the global economy as well, the IMF warned, given its large economy “and deep trade and financial linkages with other nations.” Meanwhile, “recent falls in China are being greeted by mixed feelings among traders with a degree of skepticism that we could see a rebound at any time,” he said. “Reasons for the slump in China stretch far and wide, including deleveraging, frothy valuations and extreme volatility causing nervousness. Borrowed money has been funding as much as one-third of China’s tradable stock market, according to David Cui, equity strategist at Bank of America/Merrill Lynch. Investors are blaming the selloff on a number of factors, ranging from angst over the Greece debt talks to signs that Chinese investors that have been using borrowed money to buy shares are reducing the amount of debt they have piled up to buy shares. As a round of margin calls by banks and brokerages last week sucked up this speculative trade, it effectively kicked out the engine driving China’s stock rally.

In April, China’s stock exchanges promised to make shorting easier, which many investors took as a signal that authorities were getting nervous about the pace of gains. “Margin business has been growing rapidly, but short-selling business has been developing slowly,” the exchanges said at the time. The Shanghai gauge tumbled 7.4 percent on Friday, capping the biggest two-week rout since 1996 and spurring state media and the government to make supportive comments. Investors, however, are unsure if policymakers, including China’s central bank, will once again announce fresh stimulus measures to prop up the slowing economy and tanking stock market.

Beijing this year gave most foreigners their first chance to short stocks on the mainland through the new Shanghai-Hong Kong Stock Connect trading link. Yet there have been no short sales through the link since investors were given the green light to begin doing so in early March, according to the Hong Kong stock exchange. CRRC Corp., the merged entity of China CNR Corp and CSR Corp., paced losses for industrial shares, slumping 8.6 percent and taking its decline from an April peak to more than 50 percent.

That has sent managers hunting for ways to hedge elsewhere, such as futures on the FTSE China A50 stock index, traded on the Singapore stock exchange. Those that are easiest to trade, though, give managers exposure to China’s largest companies, typically banks or state-owned enterprises, and not many of the smaller Shenzhen-listed consumer and technology companies that have logged the headiest gains. Asked about the implications of the surge in shares over the past year, five said it was a “net positive” for the economy, five said a “net negative” and eight were neutral. China’s bull market, which turned 935 days old Friday, had been the longest since bourses opened for trading in 1990 and more than five times the average lifespan of the nation’s previous bull markets.

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