Bulls head for the hills in China as stocks slump

Chinese stocks’ worst October start in a decade has scared off the last remaining bulls.

Foreigners dumped 9.7 billion yuan (Dh5.4bn) of A shares through exchange links with Hong Kong on Monday, just short of a record hit eight months ago, as mainland markets reopened after a week-long break. Ping An Insurance, Kweichow Moutai and Hangzhou Hikvision Digital Technology - old favourites that jumped at least 97 per cent last year - were the most sold by overseas traders Monday.

The FTSE China A50 Index of large caps, which includes stocks that overseas investors are more likely to own, sank almost 5 per cent for its biggest sell-off since January 2016. The yuan slumped as much as 0.78 per cent onshore to 6.9260 per dollar amid speculation the central bank will give up defending the 6.9 level, further hurting the outlook for A shares.

Some traders said the apparent absence of the national team, as China’s state-backed funds are known, helped accelerate declines in the afternoon. Supportive measures from the People’s Bank of China didn’t ease the pain, following a recent barrage of negative news, including weak manufacturing data and accusations of election meddling. The slump followed losses of a similar magnitude by Chinese shares in Hong Kong last week.

“Foreign investors turned bearish, unlike their previous optimistic buying of Chinese A shares,” said Steven Leung, executive director at Uob Kay Hian (Hong Kong). “The massive northbound selling is a sign of growing concern over the relationship between the US and China.”

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International investors had started to load up on Chinese shares as global index compilers increased weightings of yuan-denominated shares on their benchmarks and a slump made valuations more compelling relative to global peers. The nation’s equity market had already lost $2.4 trillion in value since January before Monday amid signs that deleveraging and a trade spat with the US is hurting economic growth.

Foreign demand for another type of Chinese assets will be tested later this week, when the nation markets a sale of dollar bonds.

Brokerages are giving up their bullish calls on China’s equities. JP Morgan’s cautious turn last week followed similar moves by Morgan Stanley, Nomura and Jefferies Group earlier in the year. Contrarians include HSBC, whose strategists are sticking to the overweight rating they’ve had on China throughout 2018. It’s been a “painful” call though, they said in a note Monday.

The sell-off has spread to stocks in Hong Kong, among the world’s worst performers this year.

Mainland markets may struggle to find a floor if foreigners continue fleeing, as domestic investors are unlikely to jump back in after being battered in this year’s sell-off. Policymakers’ previous attempts this year to stem declines in stocks haven’t lasted.

“The reserve requirement cut was within expectations and far from sufficient to counter the negatives on all fronts during the China holiday,” said Zhang Gang, Shanghai-based strategist with Central China Securities. “Even China’s state funds won’t be able to prop up the market until the systemic risks are all factored in.”