China Stocks Flip Brutal Start to 2019 With All Eyes on Beijing

(Bloomberg) -- China's equity investors finally got some relief at the end of a week that saw indexes sink to multiyear lows.

Word that top officials had met with banks helped revive risk appetite, with brokerages surging as traders took it as a sign that Beijing would prioritize the financial sector. A reserve-ratio cut from the central bank after Friday's close added to the bullish sentiment, sending equity futures higher in Singapore. The boost comes ahead of a U.S. visit to Beijing to talk trade, and any hints of improving relations could give Chinese stock another lift.

Investors aren't rushing to hedge against equity swings despite the wild trading. Hong Kong's volatility index is actually down this week, while another tracking expected swings on the biggest China ETF in the U.S. is barely above its 12-month average. Lessons from the past show the first weeks don't always set the tone for the year: take 2018, which started with what we can now call exuberant trading.

Hong Kong shorts

Demand to short shares is picking up, with interest especially high for old favorites like Sunac China Holdings Ltd., Country Garden Holdings Co. and China Evergrande Group (Morgan Stanley, incidentally, turned bullish on the Chinese property sector this week). Some traders say convertible-hedge positioning -- a lock-in trade favored by hedge funds -- is driving demand. Such positioning, which generates yield by buying a firm's convertible bonds and selling the underlying shares short, is a market-neutral strategy and not necessarily a bearish bet.

Still, the rush of activity -- and otherwise muted volumes as markets reopened for the year -- meant that short-selling turnover surged to almost 19 percent of all value traded in the city, the highest since 1998.

Sure bet

With data showing manufacturing contracted for the first time since mid-2017, sovereign debt could remain the place to be in January. The 10-year yield fell toward 3 percent and futures rose for six straight days, the longest stretch since May. While havens sold off on Friday after confirmation that the U.S. and China would hold face-to-face talks next week, analysts predict the rally has room to run as Beijing steps up stimulus and injects more liquidity before the Lunar New Year, as evidenced today.

Foreign investors have been betting on that, increasing their holdings of onshore Chinese debt last month by the most since June.

Chart of the week

This one shows how volatility has returned to Chinese stocks after two months of relative calm.

Catching up

Here's what else caught our eye:

• Another peer-to-peer lender collapses in China.
• January's looming liquidity hole.
• China seeks foreign buyers for its sovereign debt.
• Hong Kong's 20 percent-a-year stock picker.
• What Taiwan's best money manager of 2018 is buying.
• China's back in the market for U.S. soybeans.

To contact the reporter on this story: Sofia Horta e Costa in Hong Kong at shortaecosta@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Magdalene Fung, Kana Nishizawa

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