China's Biggest Stocks Suffer Worst Quarterly Loss in Two Years

(Bloomberg) -- China's markets have been turned upside down this year as the prevailing narrative shifted from deleveraging to trade wars, creating headaches for investors positioning ahead of MSCI Inc. inclusion in June.

Large cap stocks, which led gains in 2017, are among the biggest decliners, while beaten down small caps are staging their best rally in more than two years. Government bonds snapped a five-quarter losing streak as fears of tighter liquidity failed to materialize. Even the currency surprised, blasting past the most bullish analyst forecast.

Big caps were too "overcrowded," while government plans to boost development of the new economy sector increased the allure of smaller tech stocks, said Ken Chen, a Shanghai-based strategist with KGI Securities. "In the coming quarter we see more balanced opportunities in blue chips and small caps though, as MSCI's inclusion of A shares will support blue chips."

MSCI will add large-cap A shares to its benchmark indexes in two stages in June and September, which the index compiler projects will spur $17 billion of inflows. Complicating the outlook is China's plan to allow its overseas-listed tech giants to have a presence on mainland bourses, which could draw huge inflows from existing equities.

Here's the highlights of China's markets as the quarter draws to a close:

Stocks

• The FTSE China A50 Index of China's biggest companies is down 4.2%, its biggest retreat in two years, with insurers and liquor makers leading losses. The gauge rallied 32% last year. By contrast, the ChiNext index of smaller firms -- which are more sensitive to liquidity conditions -- has surged 8.4% in 2018, after two straight years of losses.
• Among industry groups on the broader CSI 300 Index, health-care shares are the top performers, rising 11%, while telecom and consumer staples are the worst with losses exceeding 7%
• Volatility has jumped: price swings on the CSI 300 in the past 50 days are the wildest since May 2016
• Offshore stocks did better overall: the MSCI China Index eked out a 2.2% gain -- its fifth straight quarterly advance -- with drugmakers again the clear winners

Bonds

• The yield on 10-year government debt has fallen 15 basis points to 3.75%, poised for the biggest decline since the last three months of 2015
• Policy banks also saw relief, with the yield on China Development Bank notes dropping 15 basis points

Currency

• The yuan has rallied 3.8% against the greenback, making it one of the world's top performing, and last traded at 6.2673 per dollar. The Chinese currency touched its strongest level since the August 2015 devaluation on Tuesday. At the start of the year, the median forecast by analysts tracked by Bloomberg was for the yuan to end March at 6.65.

--With assistance from Tian Chen and Kana Nishizawa

To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Adrian Kennedy

©2018 Bloomberg L.P.

With assistance from Amanda Wang