China’s stocks benchmark suffered its biggest drop in more than six months on Monday, in a pullback from record highs struck last week.
The CSI 300 index fell 3.1 per cent, the biggest fall since late July, as concerns grew of a gradual tightening in lending conditions. According to a Financial Times analysis of Bloomberg data, offshore investors were net sellers of Chinese equities on Monday for the first time since onshore bourses reopened last week following the long Golden Week holiday.
The pullback offers an early hint that as China continues its rapid economic recovery from the coronavirus pandemic, support for asset prices may start to fall away.
“Monetary conditions have tightened in practice since the start of the year,” said Sheana Yue, an economist at Capital Economics. “We expect the People’s Bank of China to formalise the shift with policy rate increases in the next few months.”
The country’s banks on Saturday kept on hold their benchmark loan prime rate, which is set by China’s largest commercial lenders and uses an official central bank interest rate as its floor. The rate has not moved since it dropped to 3.85 per cent in April last year, when cities nationwide went into lockdown in order to stamp out coronavirus outbreaks.
But other measures have become more challenging. Shanghai’s three-month interbank offered rate, a crucial lending benchmark, rose to more than 3 per cent in late November compared with below 1.5 per cent in May. The rate fell in December and January but has crept higher over recent weeks, and now stands at 2.85 per cent.
Meanwhile, the PBoC’s recent daily open market operations have not injected enough liquidity to make up for the medium-term notes that have been expiring. On Monday, that meant a net liquidity withdrawal of Rmb40bn ($6bn), helping to paint a picture of gradually shrinking monetary support.
Thomas Gatley, an analyst with Gavekal Dragonomics, said the PBoC was “in no mood to restimulate this year” as policymakers in Beijing have called for a further clampdown on financial risk. With the profit cycle for corporate China turning, he said, “my position remains that the underlying laws of gravity are going to take effect”.
Still, Monday’s sell-off comes in the context of a strong run for Chinese stocks in recent weeks and months. The CSI 300 last week touched an all-time high of almost 5,931 points, exceeding peaks reached during both the 2015 equity bubble and the global financial crisis of 2007-08.
Gatley said nerves were building about asset prices in the months ahead, but valuations were far more reasonable than during the lead-up to China’s last stock implosion.
“We’re nowhere close, particularly when you consider that in 2015 profits were in the toilet and today they’ve risen pretty nicely across sectors,” he said.
The CSI 300’s price-to-earnings ratio, a common measure of valuation, remains just shy of its 2015 high of about 22.5, according to Bloomberg data.