China Stocks, Yuan Slide as Hopes for Politburo Boost Fizzle Out

(Bloomberg) -- Chinese equities and the yuan extended losses Wednesday afternoon, gaining downward momentum as concern over possible higher U.S. tariffs overwhelmed optimism about Beijing's pledge to support economic growth.

The CSI 300 Index of large mainland-listed companies slid 2 percent, its biggest loss in a month. The offshore-traded yuan fell 0.17 percent to 6.8170 per dollar as of 4:59 p.m., while the yuan neared the weakest on record against a trade-weighted basket of currencies. The Hang Seng Index dropped 0.9 percent, erasing a gain of 0.7 percent, and the yield on 10-year government bonds slid 1 basis point.

“The policies released from the Politburo meeting overnight weren't anything surprising,” said Steven Leung, executive director at Uob Kay Hian (Hong Kong) Ltd. “The selling is mainly because of a lack of investor confidence. We need something more drastic to change the view of investors.”

A communique issued after a Tuesday evening meeting of China's 25 most senior leaders said the campaign to reduce leverage would continue at a measured pace, while noting that the external environment had “significantly changed.” According to people familiar with the deliberations, the U.S. is considering more than doubling planned tariffs on $200 billion in Chinese imports.

“Markets are still worried about further developments in the trade war,” Leung said. “It's quite difficult for them to reach any agreement in the near term. People are still worried about the deterioration of fundamentals in the second half.”

Property developers continued to slide Wednesday, after the Politburo vowed to clamp down on home-price gains. The local government in Shenzhen also revealed new tightening measures. Five of the worst 10 performers on the Hang Seng Index were real estate companies, led by Country Garden Holdings Co., which slid 6.6 percent. The company also suffered a fatal accident at one of its sites last week.

“Even if the trade war issue has been fully priced in, it doesn't mean stocks will rebound as there are few positive catalysts,” said Hao Hong, chief strategist at Bocom International Holdings Co. “Don't expect any aggressive liquidity easing and property loosening. The policy tuning is for China to solve challenges more flexibly, and the policy orientation has always been the same.”

Materials and industrial companies were among the best performing stocks earlier in the day, boosted by a Politburo call for more infrastructure investment. But their gains evaporated, as did those of technology shares, which for a brief moment looked set for a rebound after being beaten down in recent days. Sunny Optical Technology Group Co. extended its three-day loss to 8.6 percent, while Tencent Holdings Ltd. erased its 1.7 percent morning gain.

“This morning's rebound was driven by the tech sector, but the rotation has just begun and the sector will continue to be under pressure,” said Daniel So, a strategist at CMB International Securities Ltd. “Over the next two weeks, stocks will be rangebound. A potential turning point is Tencent's results on Aug. 15.”

CMB's So said the yuan should stay “more-or-less stable” and that sharp depreciation is unlikely, which should help stabilize the stock market. The yuan is the world's second-worst performing major currency over the past month, with only the Turkish lira weakening more against the dollar. The Shanghai Composite Index is one of the weakest stock markets this year too. It's down 21 percent from a Jan. 24 peak.

Analysts said there was little sign of the government stepping in to help stabilize the equity market toward the close, as the so-called national team has done in the past.

“Around July 23, when the state council announced a package of easing measures, we could see obvious buying from national team funds, including some pensions, to support the A-share market,” said Castor Pang, head of research at Core Pacific-Yamaichi International in Hong Kong. “But now it's all gone.”

Here are some more highlights:

China Developer Shares Drop as Beijing Aims to Curb Home Prices
China Toughens Housing Policy as Shenzhen Imposes More Curbs
China Politburo Signals Greater Focus on Growth Amid Trade Spat
U.S. Is Said to Consider Higher China Tariffs While Talks Sought
SJM Leads Macau Casino Rally as 3 Brokerages Raise Price Targets
Chinese Investors Flee Into Money Market Funds From Stocks
Vaccine Scare Has China Moving to Contain Consumer Backlash

To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.net;Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net;Jeanny Yu in Hong Kong at jyu107@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Will Davies, David Watkins

With assistance from Editorial Board