Chinese Stocks are Getting Pummeled as Central Bank Stimulus Fails to Provide Reassurance
Chinese equity markets continued lower on Tuesday, one day removed from their worst outing in more than three months as pent-up angst continued to weigh on investor sentiment.
After a weeklong holiday, Chinese stocks experienced an intense selloff Monday, with the China A50 index plunging 4.8%. The benchmark Shanghai Composite Index declined 3.7%, its worst performance since June 19. The tech-heavy Shenzhen Composite Index fell 3.8%.
While the worst of the bloodbath appears to be over, most major indexes tracking Chinese equities declined on Tuesday. The CSI 300 Index, Hang Seng Index and Shenzhen Composite declined. The A50 and Shanghai Composite benchmarks finished slightly higher.
The early-week declines were largely a pent-up response following the Golden Week holiday, which gave investors more time to absorb economic data and trade developments. They also reflect broad weakness in the Hang Seng and MSCI Emerging Markets Index, which declined sharply last week.
Central Bank Stimulus, Yuan Woes
New stimulus measures by the People’s Bank of China (PBOC) weren’t enough to allay fears that the yearlong trade spat with the United States would weigh on the economy. Last week, the PBOC slashed the required reserve ratio for domestic banks by 1 percentage point, or 1.2 trillion yuan, a move that would free up more funds for lending and growth. The central bank made similar cuts three times this year.
China’s national currency, the yuan renminbi, has weakened to the lowest level of the year, coming within striking distance of the January 2017 low. As Bloomberg reported Monday, the Trump administration believes that Beijing is manipulating its currency to shore up its competitiveness on the trade front.
With the yuan falling some 9% over the past six months, House Treasury Secretary Steve Mnuchin is under growing pressure to designate China a currency manipulator. There’s reason to believe that China will continue allowing its currency to fall in the face of an escalating trade war with the United States. Given its tremendous surplus with Washington, Beijing is unable to match the Trump administration in a tit-for-tat trade war. Trade negotiations between the two countries were supposed to resume last month before Beijing cancelled the meetings following the imposition of new tariffs on $200 billion of Chinese goods.
Long-term, investors can expect China’s economic slowdown to continue as it transitions to a service-oriented model. Long before Trump’s trade war went into effect, Beijing was already planning to slowly unwind its reliance on smokestack industries and shift its focus to consumption. This transition is expected to last many years, with mixed results so far.
The International Monetary Fund (IMF) has slashed China’s growth outlook next year to 6.2% from 6.4% previously, citing ongoing trade risks. The Washington-based institutional also cut its growth estimate for the U.S. to 2.5% from 2.7%.
Featured image courtesy of Shutterstock.