Chinese stocks are getting walloped

Hong Yi/China News Service/VCG via Getty ImagesView of the Ji’an Ganjiang Bridge in China being demolished.
  • Chinese stocks have been hammered upon the resumption of trade following a week-long holiday.
  • Large-cap stocks in Shanghai have shed close to 4% despite moves from Chinese policymakers to shore up economic growth.
  • The onshore Chinese yuan has also fallen sharply, mirroring a similar move in the offshore traded yuan late last week.

Chinese financial markets were closed last week for National Day celebrations.

Based on the early price action on Monday, it’s likely many Chinese investors wish they were still on holiday.

Stocks have been hammered, playing catch-up to losses seen across the broader Asian region, including in Hong Kong, last week.

Here’s the scoreboard at the mid-session break on Monday.

Shanghai Composite 2,738.04 , -2.95%
SSE50 2,503.73 , -3.95%
Shenzhen Composite 1,402.42 , -2.71%
CSI300 3,315.01 , -3.60%
CSI500 4,690.88 , -2.29%
Hang Seng 26,717.60 , -0.54%
USD/CNY 6.8971 , 0.42%
USD/CNH 6.9029 , 0.13%

Ugly, right?

Clearly, news over the weekend that policymakers at the People’s Bank of China (PBoC) will cut the required reserve ratio (RRR) by 100 basis points for most Chinese banks from October 15 has done little to diminish concerns about the broader Chinese economy, reflected in the large-scale declines seen so far during the session.

The benchmark Shanghai Composite Index has tumbled 2.95%, pulling back from multi-month highs set in the prior session.

The decline in the Composite has been outpaced by an even larger decline in large cap stocks with the SSE 50 — comprising the 50 largest stocks by market cap in Shanghai — sliding by 3.95%.

Both indexes had been down by over 3% and 4% respectively earlier in the session.

Those performances have been mirrored in all other mainland indexes — be they small cap or large, tech-orientated or otherwise — with declines ranging from 2.3% to 3.6%.

“Markets don’t think the RRR cut is going to channel more liquidity to the real economy or the stock market, or be material enough to change the direction,” Trinh Nguyen, Senior Economist at Natixis, said on Twitter.

“If monetary policy is limited, more fiscal next?”

Kevin Xie, Fixed Income Quantitative Strategist at the Commonwealth Bank, conveyed a similar view to Nguyen.

“The newly unleashed 750 billion yuan [liquidity injection into China’s financial system] is equivalent to only 0.5% of total social financing,” he said.

“While the PBoC’s latest policy initiative will support economic growth it will provide only a modest offset to the funding shortage from previous deleveraging.”

Contributing to the selling pressure, the PBoC also set the midpoint of its USD/CNY daily trading range at 6.8957, up from 6.8802 on September 28 when it last traded.

The USD/CNY hit a session high of 6.9053, following the lead provided by the offshore traded yuan, or CNH, in recent days.

The weakening in both the offshore and onshore traded yuan against the greenback reflects divergent monetary policy settings between the United States and China, helping to attract capital flows to the dollar on narrowing interest rate differentials between the two nations.

While Xie doesn’t expect a near-term sharp depreciation in yuan, he says there’s still grounds for further weakening over the medium-to-long term.

“Escalating trade friction with the US and rising US interest rates, and the collapse of China’s current account surplus, will weaken the CNY,” he says.

While not the same degree, the weakness in Chinese markets has also spillover to the broader Asian region with stocks and currencies both remaining under pressure.

Here’s the stocks scoreboard.

Australia ASX 200 6112.50 , -1.18%
NZ NZX 50 9174.53 , -0.44%
Sth Korea KOSPI 2261.69 , -0.26%
Sinagpore STI 3193.65 , -0.50%
Taiwan TAIEX 10472.93 , -0.42%
Philippines PSI 7109.13 , 0.44%
Indonesia JKSE 5753.52 , 0.38%
Malaysia KLCI Index 1773.76 , -0.19%
Thailand SET 1727.57 , 0.41%
S&P 500 Futures 2895.25 , 0.04%

And for currency markets.

AUD/USD 0.7054 , 0.04%
NZD/USD 0.6436 , -0.08%
USD/JPY 113.83 , 0.11%
USD/CNY 6.8980 , 0.44%
USD/CNH 6.9030 , 0.13%
USD/HKD 7.8322 , -0.03%
USD/KRW 1132 , 0.10%
USD/SGD 1.3828 , 0.01%
USD/TWD 30.94 , 0.08%
USD/PHP 54.28 , 0.15%
USD/MYR 4.150 , 0.14%
USD/IDR 15215 , 0.26%
USD/THB 32.89 , 0.27%
USD/INR 73.83 , 0.09%
US Dollar Index 95.70 , 0.08%

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