China’s defining moment for markets is a distant memory

(Bloomberg) – Sentiment towards China’s frayed financial markets appears to be on its last legs with rebounds not lasting, entries not sticking and wishes for more action from Beijing continuing to fall flat.

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For fund managers, that means dealing with the prospect of more equity losses, bond exits, credit defaults and a weaker currency.

The mixed reaction to China’s fiscal stimulus packages and a surprise interest rate cut last week illustrate a trend that has intensified in recent months: Xi Jinping’s government is increasingly powerless when is to rekindle the spirit of investors.

I hope the dramatic interventions of five months ago – dubbed by some as China’s “Draghi” moment over the European Central Bank President’s 2012 promise to save the euro – have turned in skepticism about whether policymakers will do all that is needed to support public finances. markets.

The MSCI China index has fallen about 12% so far this quarter, versus an 8% gain in a global stock gauge. That puts it on course for the worst quarterly performance on a relative basis since 1999 and comes just after Chinese stocks outperformed nearly 20 percentage points in the second quarter.

“China is at a crossroads in terms of investor sentiment,” said Francois Savary, chief investment officer at Prime Partners SA, which last week reduced its exposure to the country. “Will China be able to deal with its weaknesses? There is fear that the authorities have acted too little too late.

Of the at least 25 official pledges of support for the economy, markets or businesses since March 16 – when China addressed investor concerns in a then-rare coordinated blow – only four have coincided with a gain of more than 2% of the shares. Analysts have called for more concrete action since, but seem disappointed with measures such as the liquidity of property companies, lower mortgage rates and lower borrowing costs.

On Monday, stocks fell and the offshore yuan weakened to a near two-year low even as authorities planned more liquidity support for developers and Chinese banks cut their benchmark lending rates.

Faced with a choice between endless uncertainty and the belief that a recovery will soon set in, investors are leaning towards the former. Foreigners have withdrawn money from Chinese capital markets for six consecutive months and outflows hit a record high in March.

The risks have become so unquantifiable that some, like Boston-based Zevin Asset Management, are walking away.

“China’s economic dream has more or less come true and now politicians are focusing on all the repercussions that come with it,” said Sonia Kowal, chairwoman of ZAM, which recently sold all of its Chinese and Hong Kong holdings. “We would consider returning to China in the future when the country finds itself on a more sustainable path.”

Still, while the goal is to stabilize market sentiment, Beijing won’t want to go too far and risk causing a speculative bull run. China has experienced two massive bubbles since the global financial crisis and talking about the markets is a dangerous game in a country where investment choice is limited due to capital controls.

Yi Huiman, who heads the country’s securities regulator, pledged this month to keep capital markets stable, but said intervening in a functioning stock market was not appropriate.

Can things get worse for Chinese markets if officials stick to the current strategy? The stakes are high, according to Wee Khoon Chong, senior market strategist at Bank of New York Mellon in Hong Kong, who says the relationship between policy directives and asset prices in China is broken.

“Trust, in markets and among consumers, is essential to maintaining financial stability,” he said. “We therefore see no room for complacency and, indeed, consider that there is an urgent need to restore confidence.”

(Adds Monday’s moves to eighth paragraph, updates last count of support pledges to seventh paragraph)

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