Investing

China’s market decline continues — and ‘there’s a lot of pain’ to come


North American stock markets weren’t the only ones to feel the pain this week: China’s main index dipped nearly eight per cent as the country’s markets continue to endure a painful, months-long decline not seen since 2014.

Since hitting their peaks in January, China’s indexes have been decimated. The Shanghai Composite Index is down 27 per cent and hit a new low for the year on Thursday, while the tech-heavy Shenzhen Composite Index has fallen even further and is down 35 per cent since its peak.

The stunning losses have resulted in China becoming home to the world’s worst equities market.

“It’s really going to drag out here,” said Stephen Innes, head of training in Asia-Pacific for Oanda. “I think there’s a lot of pain in the China trade over the next six months to a year.”

The Chinese markets are volatile, he said, and have been at risk as the country moves “away from brick and mortar to a more services- and demand-driven economy.”

Eighty per cent of the Shanghai exchange is dominated by retail and individual stock traders, Innes said. Their speculative approach, which involves heavy doses of short selling, often results in the exchange operating “like a gambling casino.” Even after the rout, investors “are still piling money in” and “remain unfazed.”

And the presence of other headwinds, such as rising U.S. Treasury yields and the ongoing trade war with the U.S. keeping it from stabilizing.

Since July, China and the U.S. have been embroiled in a fight that has seen each country impose on the other 25 per cent tariffs on US$50 billion worth of goods. U.S. President Donald Trump continued to escalate tensions by levying China with a 10 per cent tariff on an additional $200 billion worth of imports. Without concessions, Trump said he’s debating more tariffs on $267 billion worth of Chinese imports.

Beyond the tariffs, China has been accused by the U.S. of being a currency manipulator and of tech-related spying. All it takes is one ill-timed comment from Trump to see the markets slump, Innes said.

“He can move from calling the Fed crazy to saying something is ‘loco’ for the U.S. Treasury and, boy, we’ll be down in a heartbeat,” Innes said.

Trump can move from calling the Fed crazy to saying something is ‘loco’ for the U.S. Treasury and, boy, we’ll be down in a heartbeat

Stephen Innes, Oanda

The trade war may also be playing a role in the yuan’s steep decline. The Chinese currency fell this week below seven to the U.S. dollar for the first time since the recession in 2008. Last week, the People’s Bank of China cut banks’ reserve requirement ratio by 100 points in an effort to help the yuan recover and tempt investors into borrowing more. But so far, the cut hasn’t stopped the markets from bleeding. According to a Macquarie note, the cut is “far from enough to turn the economy” around.

On Friday, the Shanghai exchange appeared to slightly rebound — by less than one per cent.

The gains come on the heels of the Fed announcing Thursday that it did not consider China to be a currency manipulator. The sentiment is still sour on Beijing, Innes said, but tech companies may prove to be good options for investors with long-term mindsets because many are in oversold territory.

“The whole Chinese e-commerce sector is as sure of a can’t-miss as you can get in the market,” he said.

Alejo Czerwonko, emerging market strategist at UBS Global Wealth Management’s Chief Investment Office, also suggested investors could benefit from dipping into the Chinese market in the long-term. Additional weakness in the market could be seen, Czerwonko said, if the U.S. reaches Phase Three of its tariff implementation — meaning nearly all imports would be affected. Traditionally, however, emerging market funds have rebounded after a 20 per cent drop. 

“You’ve never lost money if you bought after the 20 per cent drop with two, three, four, five or 10 years of investment horizon,” Czerwonko said. “Buying after a 20 per cent correction pays off.”

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