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https://www.wsj.com/articles/this-y...kets-isnt-like-2015-it-looks-worse-1530869403
Shares in Shanghai are the world’s worst performing among major markets this year.
SHANGHAI—This year’s selloff in China’s stocks and currency is reviving painful memories of the country’s last market rout, in the summer of 2015. If anything, things look more worrying this time around.
Summer Blues
China's currency and stocks have both fallen sharply in recent weeks.
Shares in Shanghai are the world’s worst performing among major markets this year, tumbling 17%. The yuan has slumped 3.6% against the dollar since the start of June, pushed down by a combination of selling by nervous investors and the Chinese central bank’s efforts to guide the currency lower as a trade conflict with the U.S. escalates.
On paper, even those big market moves pale in comparison with 2015. Three years ago the Shanghai Composite Index lost nearly half its value in the two months starting in June, bottoming out only in early 2016: They have never since regained their mid-2015 highs. The central bank also shocked markets with an abrupt 2% devaluation of the yuan in August that year.
More concerning this time round is that several factors, including Beijing’s campaign against high debt levels and its trade war with the U.S., suggest that investors are responding rationally to signs of fundamental problems for China’s economy.
The U.S. placed tariffs on $34 billion worth of Chinese goods at midnight Eastern time on Friday. And while Shanghai stocks rose .5% on Friday, their fall this year has accelerated since trade tensions ramped up in the spring.
By contrast, in 2015 the market boom and bust was driven by retail investors who—initially with government encouragement—had taken on piles of debt to bet on stocks, then rushed to sell when the market cooled.
“The 2015 market crash was like unexpectedly catching a fever that came fast but also went fast. What we are witnessing this time is a likely protracted decline,” said Landing Zhang, chief executive of Shanghai asset-management firm CYAMLAN Investment.
One big difference between this year and 2015 is that institutional investors, who typically take a longer-term view of markets, appear to be driving the equity-market selloff.
No breakdown of market trading by investor class is available, but a couple of factors indicate professionals are in the lead. First, much of this year’s Shanghai market slump is due to falling share prices of major state-owned Chinese companies such as Citic Securities and Baoshan Iron & Steel. Such blue-chip stocks are normally favored by big institutional investors.
“The latest selloff was definitely led by institutions, because in the past when the market fell, blue chips often bucked the trend. This time around, blue chips are falling, too, and it has been like a stampede,” said Amy Lin, a senior analyst at brokerage Capital Securities.
A sharp fall in the use of margin finance, which enables investors to bet on stocks with borrowed money, is a sign that China’s 90 million retail investors have had relatively less influence over this year’s market slump. The value of margin loans outstanding is down to 908.9 billion yuan ($137 billion) as of Thursday, less than half the record 2.1 trillion yuan right before the 2015 summer rout.
“Nobody, including myself and many of my friends, wants to invest in anything. There’s no confidence, and we are in no mood,” said Wu Yunfeng, a retail investor from Shanghai who said he hasn’t invested in stocks since last year.
Institutional investors’ increasingly pessimistic view of China’s outlook has started being borne out by economic data. Despite solid growth in the first quarter, figures for May showed a slowdown in areas including investment and retail sales. Beijing’s campaign against shadow-banking activity more than halved China’s overall credit supply in May.
“The economy was in better shape in 2015, and the stock market had rallied for a long time before the crash. There was also no trade war at that time,” Ms. Lin said.
Institutional investors’ increasingly pessimistic view of China’s outlook has started being borne out by economic data. Despite solid growth in the first quarter, figures for May showed a slowdown in areas including investment and retail sales. Beijing’s campaign against shadow-banking activity more than halved China’s overall credit supply in May.
“The economy was in better shape in 2015, and the stock market had rallied for a long time before the crash. There was also no trade war at that time,” Ms. Lin said.
For some, the market gloom is an overdue reflection of the difficult task policy makers in Beijing face in trying to juggle a financial-system housecleaning while protecting economic growth—all against the backdrop of a trade war.
China’s central bank has faced a dilemma when it comes to managing the yuan’s level against the dollar, too. Rising U.S. interest rates and slowing Chinese growth have created market pressure for the yuan to fall. Beijing may be happy to see the yuan slide, in part to offset any impact on its exports as trade tensions rise.
Still, policy makers are eager not to let the yuan drop too far, too fast, in case that encourages heavy capital outflows that could cause a liquidity shortage in China’s financial system.
“It does make sense to witness a shift in sentiment because we were always surprised by how sanguine Beijing has looked with its deleveraging campaign. We didn’t think it was priced in by the market,” said Julian Evans-Pritchard, Singapore-based economist at research firm Capital Economics.
Investor uncertainty over whether Beijing can pull off a deleveraging of China’s economy and avoid a significant slowdown has deepened amid some mixed signs from policy makers. While authorities have tried to cut back on credit by shadow-banking institutions, they have also freed up more funds for bank lending three times this year.
“The government wants to guide more money into the real economy, but it hasn’t been easy because investors aren’t showing lots of confidence in Chinese companies, especially those in the manufacturing sector,” said CYAMLAN Investment’s Mr. Zhang.
Shares in Shanghai are the world’s worst performing among major markets this year.
SHANGHAI—This year’s selloff in China’s stocks and currency is reviving painful memories of the country’s last market rout, in the summer of 2015. If anything, things look more worrying this time around.
Summer Blues
China's currency and stocks have both fallen sharply in recent weeks.
Shares in Shanghai are the world’s worst performing among major markets this year, tumbling 17%. The yuan has slumped 3.6% against the dollar since the start of June, pushed down by a combination of selling by nervous investors and the Chinese central bank’s efforts to guide the currency lower as a trade conflict with the U.S. escalates.
On paper, even those big market moves pale in comparison with 2015. Three years ago the Shanghai Composite Index lost nearly half its value in the two months starting in June, bottoming out only in early 2016: They have never since regained their mid-2015 highs. The central bank also shocked markets with an abrupt 2% devaluation of the yuan in August that year.
More concerning this time round is that several factors, including Beijing’s campaign against high debt levels and its trade war with the U.S., suggest that investors are responding rationally to signs of fundamental problems for China’s economy.
The U.S. placed tariffs on $34 billion worth of Chinese goods at midnight Eastern time on Friday. And while Shanghai stocks rose .5% on Friday, their fall this year has accelerated since trade tensions ramped up in the spring.
By contrast, in 2015 the market boom and bust was driven by retail investors who—initially with government encouragement—had taken on piles of debt to bet on stocks, then rushed to sell when the market cooled.
“The 2015 market crash was like unexpectedly catching a fever that came fast but also went fast. What we are witnessing this time is a likely protracted decline,” said Landing Zhang, chief executive of Shanghai asset-management firm CYAMLAN Investment.
One big difference between this year and 2015 is that institutional investors, who typically take a longer-term view of markets, appear to be driving the equity-market selloff.
No breakdown of market trading by investor class is available, but a couple of factors indicate professionals are in the lead. First, much of this year’s Shanghai market slump is due to falling share prices of major state-owned Chinese companies such as Citic Securities and Baoshan Iron & Steel. Such blue-chip stocks are normally favored by big institutional investors.
“The latest selloff was definitely led by institutions, because in the past when the market fell, blue chips often bucked the trend. This time around, blue chips are falling, too, and it has been like a stampede,” said Amy Lin, a senior analyst at brokerage Capital Securities.
A sharp fall in the use of margin finance, which enables investors to bet on stocks with borrowed money, is a sign that China’s 90 million retail investors have had relatively less influence over this year’s market slump. The value of margin loans outstanding is down to 908.9 billion yuan ($137 billion) as of Thursday, less than half the record 2.1 trillion yuan right before the 2015 summer rout.
“Nobody, including myself and many of my friends, wants to invest in anything. There’s no confidence, and we are in no mood,” said Wu Yunfeng, a retail investor from Shanghai who said he hasn’t invested in stocks since last year.
Institutional investors’ increasingly pessimistic view of China’s outlook has started being borne out by economic data. Despite solid growth in the first quarter, figures for May showed a slowdown in areas including investment and retail sales. Beijing’s campaign against shadow-banking activity more than halved China’s overall credit supply in May.
“The economy was in better shape in 2015, and the stock market had rallied for a long time before the crash. There was also no trade war at that time,” Ms. Lin said.
Institutional investors’ increasingly pessimistic view of China’s outlook has started being borne out by economic data. Despite solid growth in the first quarter, figures for May showed a slowdown in areas including investment and retail sales. Beijing’s campaign against shadow-banking activity more than halved China’s overall credit supply in May.
“The economy was in better shape in 2015, and the stock market had rallied for a long time before the crash. There was also no trade war at that time,” Ms. Lin said.
For some, the market gloom is an overdue reflection of the difficult task policy makers in Beijing face in trying to juggle a financial-system housecleaning while protecting economic growth—all against the backdrop of a trade war.
China’s central bank has faced a dilemma when it comes to managing the yuan’s level against the dollar, too. Rising U.S. interest rates and slowing Chinese growth have created market pressure for the yuan to fall. Beijing may be happy to see the yuan slide, in part to offset any impact on its exports as trade tensions rise.
Still, policy makers are eager not to let the yuan drop too far, too fast, in case that encourages heavy capital outflows that could cause a liquidity shortage in China’s financial system.
“It does make sense to witness a shift in sentiment because we were always surprised by how sanguine Beijing has looked with its deleveraging campaign. We didn’t think it was priced in by the market,” said Julian Evans-Pritchard, Singapore-based economist at research firm Capital Economics.
Investor uncertainty over whether Beijing can pull off a deleveraging of China’s economy and avoid a significant slowdown has deepened amid some mixed signs from policy makers. While authorities have tried to cut back on credit by shadow-banking institutions, they have also freed up more funds for bank lending three times this year.
“The government wants to guide more money into the real economy, but it hasn’t been easy because investors aren’t showing lots of confidence in Chinese companies, especially those in the manufacturing sector,” said CYAMLAN Investment’s Mr. Zhang.
