'Extremely lucky' China at risk as global stocks rally

As stock markets climb around the world, Chinese traders aren’t celebrating.

The Shanghai Composite Index has fallen 3.9% this week, the worst performance among 93 global benchmark gauges tracked by Bloomberg and the steepest decline since January. 

It’s not just the stock market.

The yuan is trading around its lowest level against a basket of currencies since November 2014, while yields on corporate debt have risen for 10 of the past 12 days.

Concern is mounting over rising credit defaults, while traders are also paring bets for more stimulus amid signs of stabilising growth, according to Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai. 

A sudden 4.5% plunge by the benchmark equity gauge on Wednesday revived memories of January’s stomach-churning turmoil, when shares sank 23% over the course of the month.

“People are still very sceptical, and with good reason,” said Hao Hong, China strategist at Bocom International Holdings in Hong Kong.

International concern about the health of China’s economy has been fading from view as data showed an improving picture and volatility in its stock and currency markets waned. 

Wednesday’s equity tumble in Shanghai caused barely a ripple among global shares as international traders focused on surging commodity prices — spurred partly by expectations of higher Chinese demand.

Questions are being asked about how long the Communist Party can keep pumping money into the economy to prop up growth. New credit topped $1 trillion (€884 billion) in the first quarter, helping GDP to expand 6.7% — still the slowest pace in seven years. 

Much of that money flowed into the property market, spurring concerns of a bubble.

“There’s still a lot of doubt over the sustainability of the turnaround in the Chinese macro numbers,” said Adrian Zuercher, head of Asia asset allocation in Hong Kong at UBS Group’s wealth management unit.

 “It’s a very stimulus-driven rebound that we now see,” he said. 

Billionaire investor George Soros said on Wednesday that China’s credit-fuelled economy resembles the US in 2007-08 before the global financial crisis and most new loans are going toward servicing bad debt and keep loss-making enterprises alive.

Andrew Colquhoun, the head of Asia Pacific sovereigns at Fitch Ratings, warned that China is adding to a debt burden that’s already unsustainable.

Michael Shaoul, chief executive of Marketfield Asset Management in New York, said some investors are just too pessimistic. 

The recovering property market and sheer scale of monetary and fiscal stimulus that has been unleashed hasn’t been fully priced in by markets, Mr Shaoul said.

 “I actually think that China is more likely to be the bearer of good rather than bad news over the next few quarters,” he said.

Optimists aren’t in short supply in Hong Kong, where a gauge of Chinese shares is outperforming the Shanghai measure by the most in almost six months.

The Shanghai Composite added 0.2% yesterday, while the Hang Seng China Enterprises retreated 1.4%.

The breakneck pace of lending is failing to hold off defaults or drive earnings. Local issuers have canceled 78.3 billion yuan (€10.7bn) of security sales in April alone after at least seven firms missed local note payments this year, already reaching the tally for the whole of 2015.

Analysts are cutting profit forecasts for Shanghai Composite Index companies by the most since the global financial crisis.

While a stabilising yuan against the dollar has eased fears of a rapid depreciation, it’s also masking weakness in the Chinese currency against a broader range of peers.

Such a sanguine outlook on the yuan may not hold for long, said Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong.

“China has been extremely lucky on this front over the past few months,” Mr Kujis said. 

“There is still a pretty significant risk that sentiment on the currency could turn around quite quickly,” he warned.

Reporting by Enda Curran and Justina Lee of Bloomberg


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