Commentary on Political Economy

Friday 11 December 2020


China Stocks Post Worst Week in Two Months as Liquidity Tightens

Bloomberg News
Updated on 
  • CSI 300 slides 3.5% this week, most among global benchmarks
  • Central bank has signaled it will tighten the supply of cash

Chinese stocks suffered their worst weekly decline since September, as concern over high valuations and the tightening supply of cash weighed on the market.

The CSI 300 Index dropped 1% Friday, extending this week’s loss to 3.5%. That’s the worst performance among global benchmarks. Brokerages -- whose shares are typically an indicator of investor sentiment -- have suffered some of the biggest losses in the past five sessions. A gauge of financial stocks slumped 5.4% this week, the most since state media criticized one of China’s most popular stocks in mid-July.

Sentiment has turned more downbeat this week amid concern over whether there’s sufficient liquidity in the financial system. That’s putting pressure on stocks with lofty valuations, as the CSI 300 trades near its priciest earnings multiple in five years. In another sign that stocks may be peaking, at least eight companies have this week announced plans from insiders to sell their stakes in the coming months.

“Without liquidity support it’s unlikely the market will keep pushing higher so investors choose to lock in profits before year-end,” said Dai Ming, a fund manager at Hengsheng Asset Management Co. “Credit events like Suning and Yongcheng Coal also hurt risk appetite.”

Chinese shares are underperforming global shares

The People’s Bank of China has recently signaled it will allow liquidity to tighten in the coming months, as it seeks to stabilize the level of debt in the economy. Market rates have this month been pricing in the risk of deleveraging: on Friday, the benchmark seven-day repo rate surged 23 basis points, in line for the most since October.

“We believe the current market consensus valuation is not
sustainable and will come down within the course of next 12 months,” Morgan Stanley analysts Laura Wang and Fran Chen wrote in a Dec. 10 note. They target a 14.3 multiple for the CSI 300 at the end of next year, based on projected earnings. The index traded at almost 15 times estimated profit this month.

The decline in Chinese shares is notable given the general bullishness in global equities. The MSCI All-Country World Index is near a record high and is little changed over the five-day period. By contrast, the CSI 300 has fallen every day this week. Daily average turnover on the county’s exchanges was below 730 billion yuan ($112 billion) this week, the lowest since October.

“There has been a bit of discord lately on the monetary approach next year,” said Huang Huiming, fund manager at Nanjing Jing Heng Investment Management Co. “I’ve also heard some say that the bounce back in consumption so far is not as robust as desired, and on top of that there may be concerns about valuations of stocks that institutional investors favor.”

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