China asset-bubble warning halts stock frenzy in Hong Kong

Hong Kong's Hang Seng Index slid 2 per cent from its highest level since June 2018. PHOTO: REUTERS

HONG KONG (BLOOMBERG) - A chill swept through China's stock and bond markets on Tuesday (Jan 26) after the central bank unexpectedly withdrew funds from the financial system amid warnings about growing froth.

Hong Kong's Hang Seng Index slid 2 per cent from its highest level since June 2018, led by a 5 per cent plunge in Tencent Holdings. Futures on Chinese government bonds due in a decade were poised for the biggest decline since August, while the seven-day repurchase rate jumped 29 basis points to 2.72 per cent, the highest level in a year.

The People's Bank of China withdrew a net 78 billion yuan (S$16 billion) via open-market operations on Tuesday. PBOC advisor Ma Jun told local media risks of asset bubbles - such as in the stock or property market - will remain if China doesn't shift its focus toward job growth and inflation management instead.

Easier liquidity helped send stocks in Hong Kong and mainland China surging in recent months. Mainland investors have bought a net HK$259 billion (S$44.3 billion) worth of Hong Kong stocks this year, almost 40 per cent of last year's total, helping to make the city's equities the world's best performers. The CSI 300 Index of shares in Shanghai and Shenzhen is near a record.

"The PBOC wants to bring investors out of the euphoria caused by abundant liquidity in December," says Xing Zhaopeng, an economist at Australia & New Zealand Banking Group. "The PBOC is unlikely to loosen its purse strings at least this week, which will make cross-month liquidity very tight."

PBOC Governor Yi Gang said the central bank will seek to support economic growth while limiting risks to the financial system - a continuation of its existing policy stance. Yi said China's total debt-to-output ratio climbed to around 280 per cent at the end of last year.

Tencent's drop came after the stock surged 11 per cent on Monday, its best day since 2011, to approach a trillion-dollar market value.

Onshore funds purchased a record amount of Hong Kong shares this month, with about a quarter of that targeting Tencent. With more than a billion users on its WeChat social-media platform, Tencent is ubiquitous to Chinese investors who have no access Hong Kong shares of rival Alibaba Group Holding through the stock links.

Tencent was the most recent mega-cap company to benefit from investor enthusiasm for the tech sector, with its looming milestone a marker for the euphoria sweeping the stocks globally. Before Tuesday, the stock had added US$251 billion in January alone - by far the biggest creation of shareholder wealth worldwide. Warnings are rising that easy monetary policy is fueling bubbles in global equities, especially in the US, where gains have been led by the Nasdaq.

As investors seek cheaper alternatives, they've been piling into Hong Kong equities. That's helped make the Hang Seng China Enterprises Index the best performing among the world's major benchmarks in the past month.

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