China’s stocks fell Monday after data suggesting economic growth was running below the 2015 target level of about 7% heightened concerns about the health of the economy.
The economic concerns offset the impact of plans announced at the weekend to reform the bloated state-owned enterprise sector and produce “decisive” results by 2020.
Underscoring the fragility of China’s financial markets even after some respite last week, currency traders suspected the central bank intervened to prop up the yuan in onshore markets, which wobbled following a report that net capital outflows in the first quarter of the year were more than $100 billion.
“China’s economy faces relatively big downward pressure, so investor sentiment remains weak,” said Gu Yongtao, strategist at Cinda Securities.
China’s stock markets have been on a roller-coaster ride in the past few months, falling close to 40% since June and prompting frantic efforts by authorities to restore confidence. Still, at their peak this year, they were up more than 150% compared with the lows of 2014.
A surprise devaluation of the yuan in August further roiled markets, reinforcing concerns the economy was weaker than previously thought and forcing China to burn through its foreign exchange reserves to keep the currency stable.
A flurry of economic data in the past week has fed those concerns and prompted Premier Li Keqiang to try to reassure markets that China is on track to meet its main economic growth targets. The government has said it expects GDP growth of around 7% this year.
Price data pointed to increased deflation pressure and lower-than-expected industrial output and investment figures this weekend raised further doubts.
“Overall, the economy is very weak and the central bank may have to continue cutting interest rates and banks’ reserve requirement,” said Zhou Hao, senior economist at Commerzbank AG in Singapore, adding he thought growth would dip below 7% in the July-September quarter.
China CSI300 stock index futures fell, some by as much as 7 percent, underlining investor scepticism in the stock market’s upside potential.
Reforms to ‘zombie’ companies
Government plans on restructuring of state-owned enterprises (SOEs), including allowing private investment, appeared to offer little for investors to feed off.
The mammoth task could involve some 25,000 enterprises owned and managed by local governments and more than 100 managed centrally under the State-owned Assets Supervision and Administration Commission, or SASAC.
“The plan has long been expected,” said Cinda’s Gu. “So interest toward the theme could be short-lived.”
On Monday, Zhang Xiwu, deputy head of SASAC, told a news briefing that China would centralize state-owned capital in key industries, while restricting state investment in industries not in line with national policies.
“We will make more efforts in reforming ‘zombie enterprises’, long-time loss-making enterprises and in disposing of those low-efficient and non-performing assets,” Zhang said.
The yuan erased some early losses following suspected intervention by the central bank via state-owned banks, traders said.
The currency CNY=CFXS was changing hands at 6.3692 per dollar in the spot market onshore, marginally higher than the previous close.
The price spread between the offshore and onshore yuan markets remained narrow, indicating overseas investors were heeding the indirect warning delivered by China last week, when state-owned banks – appearing to act on behest of the central bank – massively bid up the yuan in offshore markets in London and Hong Kong.
The offshore market continues to price in a slight discount however, suggesting expectations persist that the yuan will fall.