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Thursday, October 17th, 2019

Chinese Stocks Tumble, Dragged by Plunge in Small Caps — Update

by July 17, 2017 General

By Ese Erheriene 

Chinese equity markets tumbled shortly after trading began on Monday, dragged by a plunge in small-cap stocks after a high-profile financial conference signaled that policy makers are focused on tighter control of the economy.

Policy makers at the National Financial Work Conference, which wrapped up on Saturday, mentioned “risk” 31 times and “regulation” 28 times, noted Jack Siu, an investment strategist for Asia-Pacific at Credit Suisse.

“Good news is now bad news,” said Mr. Siu. “The logic behind that is the [People’s Bank of China] and the government are looking to balance the risk prevention versus a moderate GDP growth.”

The country’s leadership during the conference, held every five years, pledged to focus on developing a direct-financing system, indicating that the relatively faster pace of initial public offerings could continue, analysts said. That added to the “pessimistic mood over small caps,” said Shen Zhengyang, an analyst at Northeast Securities.

China’s securities regulator on Friday approved nine deals that are set to raise a combined 4.2 billion yuan ($625 million).

Still, the release of upbeat economic data helped moderate the Chinese market’s declines. China’s economy grew 6.9% in the second quarter from a year earlier, matching the increase in the first quarter. That beat economists’ expectations of a 6.8% expansion and Beijing’s full-year growth target of 6.5%.

The Shanghai Composite fell as much as 2.6% and the Shenzhen Composite slumped 4.5% at one point; they were last down 0.9% and 2.6% respectively.

The market declines come even as the People’s Bank of China pumped a net 140 billion yuan into the interbank market on Monday, the biggest such injection since June 6, ahead of key data releases.

“It’s reverse psychology,” said Hao Hong, managing director and head of research at BOCOM International. “If everything is fine, you don’t have to inject liquidity. But if they’re injecting liquidity, something must be wrong.”

Elsewhere in the region, equity markets were broadly higher at the start of the week, tracking gains in U.S. indexes as investors distanced themselves from concerns around imminent rate increases.

Softer-than-expected U.S. economic data on Friday could compel the Federal Reserve to keep interest rates low for longer than expected, analysts say. This helped drive the Dow Jones Industrial Average and the S&P 500 to close at records last week.

South Korea’s Kospi index was last up 0.3%, boosted by a 0.6% gain for index heavyweight Samsung and on course for another record close.

Singapore’s Straits Times Index was up 0.1%, while Hong Kong’s Hang Seng Index added 0.4%. Japanese markets were closed for a public holiday.

“What’s really driving [Asian markets] is this positive lead coming through from U.S. markets on Friday,” said Jingyi Pan, a market strategist at IG Group. The economic data out “really induced the market to pare back rate hike expectations.”

The likelihood of a rate increase at each meeting before December is less than 15%, according to CME Group data.

in Australia, the S&P/ASX 200 slipped 0.1% as its heavily-weighted financial sector took a knock. The country’s big four banks– Commonwealth Bank of Australia, Westpac Banking, National Australia Bank and Australia and New Zealand Banking, which contribute about one-third of the benchmark index’s weighting–were down around 0.3%.

The declines in Australian banking stocks come despite weakness in the Australian dollar against the U.S. unit, as the currency pair pulled back after rallying Friday to a near two-year high of 0.7836.

The Australian dollar will likely to see more gains this week, supported by encouraging Chinese economic activity and favorable Australian employment conditions, said the Commonwealth Bank of Australia.

In the commodities sphere, oil prices were modestly higher in Asia following further gains on Friday in the U.S., with the shutdown of a Nigerian oil pipeline helping give the market a lift. Futures rose some 5% last week, helped by Friday’s subdued growth in the U.S. oil-rig count.

Prices rose every day last week as investors of late have taken a glass-half-full view on the crude market, noted ANZ Research, amid some encouraging data points.

Yifan Xie

, Gregor Stuart Hunter and

Ben Collins

Write to Ese Erheriene at