(Bloomberg) -- China’s stock and bond markets are giving a clear signal to policymakers that they need to take more steps to revive investor confidence.
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Stocks fell for a third day on Tuesday, paring last week’s rebound that was driven by optimism over a market rescue package. The benchmark 10-year bond yield dropped to the lowest level in more than two decades, as traders bet the People’s Bank of China will deploy more monetary stimulus to boost growth.
The gloom over the world’s second-biggest economy has deepened this week as the liquidation of debt-ridden China Evergrande Group — once the nation’s largest developer — intensified concerns about the embattled real estate sector. Investors see few reasons to be optimistic as earnings from major companies disappoint, while geopolitical risks resurface before the US presidential election later this year.
“This pattern of new lows in bond yields and resumption of declines in equities highlights to us that the market is concerned that stimulus is not sufficient to address the current deflationary environment,” Morgan Stanley strategists including Jonathan Garner and Laura Wang wrote in a note. “Our economists continue to argue that a major fiscal package targeting the consumer is needed.”
Read more: Morgan Stanley Cuts China Stock Targets, Raises Japan Estimates
The Hang Seng China Enterprises Index, a gauge of Chinese stocks listed in Hong Kong, slid 2.5% on Tuesday to be the worst performer in Asia. BYD Co. was one of the biggest drags on the gauge after the EV giant’s profit missed estimates. The CSI 300 Index closed down 1.8% even as overseas investors bought about 1.7 billion yuan ($243 million) of mainland shares on a net basis.
China’s benchmark 10-year bond yield slipped to 2.46%, the lowest since 2002, as demand for haven assets rose amid expectations the economy will remain pressured by weak consumption and a property downturn.
The renewed slide in equities shows investors are more likely to sell into any gains unless Beijing takes bolder steps. While investors initially cheered last week’s report on a stock-market-rescue package and the PBOC’s decision to cut the reserve requirement ratio, the rebound has proved short-lived.
A Bloomberg Intelligence gauge of Chinese developers tumbled more than 4% on Tuesday and is already down almost 16% so far in 2024. Monday’s ruling on China Evergrande Group from Hong Kong Judge Linda Chan is the latest twist in a saga that saw the firm amass more than $300 billion of liabilities during China’s debt-fueled property boom, before turning into the poster child of a market bust that shows few signs of ending.
“Our view is that investor confidence cannot return until the property sector is finally fixed. Ongoing newsflow confirms that the property crisis is still hot and not easy to resolve,” said Kieran Calder, head of equity research for Asia at Union Bancaire Privee. “Valuations are clearly cheap but for good reasons including self-inflicted damage to the tech and real estate sectors.”
Beijing faces an uphill task in luring back investors after a rout that has wiped out more than $6 trillion from the market value of Chinese and Hong Kong stocks since a peak reached in 2021. The slump is reinforcing a structural shift that’s seeing everyone from active money managers to passive funds turn their back on the world’s second-largest stock market.
Read more: Here’s What China Is Doing to Boost Economy, Rescue Markets
Sentiment toward China stocks trading in Hong Kong was dealt a further blow on Tuesday as the city announced details about a planned national security law — a move that will have wide-ranging implications for Hong Kong’s status an international financial center.
Economists predict that data due Wednesday will show China’s manufacturing sector remained in contraction for the fourth month in January.
China’s recent pledges “may have provided some relief to China equities, but more is needed for a structural uplift,” said Daniel Tan, a fund manager at Grasshopper Asset Management in Singapore. “It could be too early to call the bottom for China equities or to assume global funds are widely increasing their allocation.”
--With assistance from Ishika Mookerjee, Abhishek Vishnoi, John Cheng and April Ma.
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