China crackdown rout spreads amid fears of foreign sell-off

The Nasdaq Golden Dragon China Index plunged 7 per cent on July 26. PHOTO: REUTERS

HONG KONG (BLOOMBERG) - A rout in Chinese shares in the crosshairs of Beijing's regulatory crackdown extended into global bond and currency markets on Tuesday (July 27) as speculation swirled US funds are offloading China and Hong Kong assets.

The Hang Seng Tech Index, a gauge of many Hong Kong-listed Chinese stocks, dropped 10 per cent, falling into negative territory exactly one year after it was first launched. China's CSI 300 Index fell close to 4 per cent, and the yuan slid to its lowest since April against the US dollar.

US Treasuries climbed with the greenback and the yen as investors sought havens, while China's bonds slumped. Unverified rumors the US may restrict investments in China and Hong Kong exacerbated the move, according to traders. US stock futures pointed lower.

"Although we can't verify if it's true or not, the market fears that foreign capital will flow out from the Chinese stock market and bond market on a large scale, so sentiment is badly hurt," Li Kunkun, a trader from Guoyuan Securities said of the speculation.

Bond Pessimism

Bonds quickly reversed an earlier gain in afternoon trading as pessimism bled into fixed income markets. The yield on the most actively traded 10-year government notes rose seven basis points to 2.94 per cent, the most since in a year. The offshore yuan fell as much as 0.6 per cent to 6.52 per dollar and one-month volatility in the currency pair posted the biggest jump since May.

"The spread of declines from the Chinese equities space into the yuan signals that the concerns over regulatory risk in China might have taken a turn for the worst," said Terence Wu, foreign-exchange strategist at OCBC in Singapore.

Fears of a decoupling between the US and China could give the dollar and yen a boost against other currencies, according to Fiona Lim, a senior FX analyst at Maybank in Singapore.

Investors in some of China's most vibrant sectors - from technology to education - have found themselves in the firing line this month as Beijing attempts to rein in private enterprises it blames for exacerbating inequality, increasing financial risk and challenging the government's authority. A seeming acceptance of short-term pain for stockholders in pursuit of China's longer-term socialist goals is a rude awakening for those more used to government support for financial markets.

"The key concern now is whether regulators will do more and expand the crackdown to other sectors," said Daniel So, strategist at CMB International Securities. "The regulatory concerns will be the key overhang to the market for the second half."

Mr So added that it was too soon in his opinion for investors to "bottom fish."

Technology and education shares retreated once again Tuesday while property stocks also fell. Internet giant Tencent Holdings slumped over 10 per cent, after the company's music arm gave up exclusive streaming rights and was hit with fines. Food-delivery giant Meituan fell as much as 18 per cent, its biggest decline ever, as investors digested new rules on online food platforms.

Turnover on Hong Kong's main equity board reached a record high of HK$361 billion (S$63 billion).

Regulatory Crackdown

Stocks had tumbled in "panic selling" on Monday after regulators on Saturday published reforms that will fundamentally alter the business model of private tuition firms teaching the school curriculum. Hong Kong's major retail brokers lowered margin financing for battered Chinese education stocks as investors suffered steep losses.

"There is no anchor for us to justify the stock valuations now given the regulation uncertainties," said Dai Ming, a Shanghai-based fund manager at Huichen Asset Management. "In the past, the market was expecting normal regulations on certain sectors, but now it looks like the government can even tolerate killing a whole industry or some leading companies when it's needed."

Meanwhile, sentiment toward property stocks was hit as China Evergrande Group surprisingly decided against declaring a special dividend after investors were spooked by news that banks and ratings companies are growing wary of the debt-laden developer. Its shares fell as much as 17 per cent.

A Bloomberg Intelligence index of Chinese property developers slid over 5 per cent on Tuesday after slumping almost 5 per cent on Monday as investors feared regulations on the sector will tighten further.

Elsewhere, a gauge tracking the nation's healthcare stocks dropped close to 8 per cent as concerns grew they may become Beijing's next target.

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