(Bloomberg) — The battle between fear and greed is wreaking havoc on Chinese financial markets.
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With China bulls finally getting some vindication as the country’s stocks and bonds rally, the past week shows that investors need to be prepared for wild swings. Take Country Garden Holdings Co., the nation’s largest developer. On Monday, its 2024 bond plunged 10 cents on the dollar to trade as a stressed asset, only to jump a record 14 cents two days later. The Hang Seng index of Chinese companies fell for five straight days before rallying the most since July on Thursday.
After last year saw one of the worst relative performances in recent Chinese market history, the country’s ultra-low valuations stand out. While the People’s Bank of China stepped up monetary easing last week and pledged to do more, its dovish tone sets it apart from tighter policies in most major economies. Signs that the Communist Party may withdraw its campaign against the real estate sector add to the bullish trend as traders seek alternatives to pricey global tech stocks.
“We’re starting to see more and more policy adjustments aimed at, what we’re seeing, damage limitation,” said Citigroup Inc. strategists led by Dirk Willer. The “recovery in real estate bonds is mainly a short cover, but nevertheless a welcome one”.
Many investors, analysts and strategists are betting their reputation on a 2022 rally in Chinese markets. Since late last year, Societe Generale SA, Goldman Sachs Group Inc., BlackRock Inc., UBS Group AG and HSBC Holdings Plc have all been overweight domestic equities. In December, JPMorgan Chase & Co.’s Marko Kolanovic recommended betting on China this year, predicting that the MSCI China index would rise nearly 40%.
SocGen strategists say Chinese stocks make up 20% of their global equity exposure in a multi-asset portfolio.
On the credit front, firms such as Allianz Global Investors, Axa Investment Managers and Oaktree Capital Group have said in recent months that they are looking to increase their holdings of battered real estate debt. Jason Brown, a former head of Goldman’s special situations group, last month raised an initial $245 million for his Arkkan Capital to invest in distressed Chinese mortgages and bonds.
Such optimism has been tested many times. The Hang Seng China gauge fell to a nearly six-year low earlier this month and the yield on Chinese junk dollar bonds jumped above 20% as risks to the economy grew.
“A lot of people in the market were too optimistic and called for a strong rebound too soon,” said Hao Hong, chief strategist and head of research at Bocom International.
From now on, bullish bets prove to be more fruitful. The Hang Seng Index closed its fifth week of gains – the longest winning streak in two years. Real estate bonds rose amid speculation, authorities will take steps to ease the industry’s liquidity crunch. A local media report said Friday that banks had accelerated mortgage approvals in some major cities. Regulators could ease restrictions on developers’ access to funds from pre-sold homes, according to reports earlier in the week.
Successful funding deals by two of China’s biggest developers have also helped ease fears that stronger companies are under financial strain. Country Garden raised $500 million by selling convertible bonds, according to a filing released Friday. Greentown China Holdings Ltd., the seventh largest developer by contract sales, this week sold a $400 million bond in the largest offshore deal by a developer since September.
Even though stocks ended the week higher in Hong Kong, measures of expected swings rose as derivatives traders bought protection. The city’s VIX equivalent climbed 11%, the most in two months. The record rally in Chinese property bonds lost momentum on Thursday as investors debated whether looser rules on the use of blocked funds would provide enough short-term liquidity.
Reasons for caution remain. Many weaker developers with looming maturities are still locked out of the dollar bond market, and worries about hidden debt risks are keeping traders on edge. China Aoyuan Group Ltd. just became the eighth known developer to default on its dollar debt since October. The Chinese crackdown on the tech industry shows no signs of letting up, with Beijing vowing to limit their influence and stamp out corruption linked to the “chaotic” expansion of capital.
Nor is there any real playbook for what happens to the markets when the PBOC diverges so far from the Federal Reserve on policy. China’s central bank has rarely cut interest rates during US tightening cycles – according to one economist, the last time was in 1999, when China was effectively closed to most international investors.
“There is a clear need to introduce more measures to anticipate systemic risks, and we expect further policy adjustments in the coming weeks,” DBS Group currency and credit strategists wrote in a note. recent. “Volatility remains the theme.”
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