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China’s blue-chip index suffered its worst one-day fall in 17 months on Thursday, as investors cited rising bond yields and tough new regulations targeting corporate debt for scaling back their exposure to equities after a strong performance this year.
The yield on 10-year Chinese government bonds rose above 4 per cent, before easing in late trade according to ChinaBond, the latest milestone in a bond rout that has gathered pace over most of this year.
Analysts say the bond turmoil reflects the government’s increasing determination to rein in runaway debt growth, raising concern among investors that China’s economy will slow and knock global demand for commodities. The previous two major bouts of global risk aversion were triggered in January 2016 and August 2015 by worries over China’s economic outlook.
Last week, five regulators led by the People’s Bank of China introduced the toughest rules yet designed to curb shadow banking. They restrict banks’ ability to buy bonds with borrowed money and to lend to corporate clients through off-balance-sheet channels.
The rules will curb demand for bonds directly and could also hamper economic growth and corporate earnings via tighter credit conditions.
The CSI 300 index, which tracks the largest companies traded in Shanghai and Shenzhen, closed 2.9 per cent lower, the worst one-day loss since June 2016.
The benchmark remains 24 per cent higher this year, although analysts said the link between bond turmoil and the stock market was less clear.
“In the first half, big-name shares rose by so much. Now with year-end evaluations approaching, people want to cash out and lock-in their profit numbers,” said Dong Chunxiao, equity strategist at Pacific Securities in Beijing. “Rising bond yields may have contributed, but I don’t think it’s the driving force.”
Ms Dong noted that the mainland stock market rose strongly last week, despite a similar jump in bond yields.
The broader Shanghai Composite index is up 8 per cent despite shedding 2.3 per cent on Thursday.
“Right now the index is in an oscillating pattern of three steps forward, two steps back. A few days ago the market rebounded pretty sharply, so today it corrected,” said Lin Longpeng, strategist at Guotai Junan Securities in Shanghai.
Also this week, the Shanghai stock exchange took the unusual step of criticising an investment bank for an overly optimistic research report on Kweichow Moutai, the luxury liquor producer whose stock has rallied 90 per cent this year. That move contributed to a perception that regulators are focused on restraining asset bubbles.
On Wednesday, a multi-agency task force on internet finance suspended approvals for new online consumer loan companies, amid concerns about abusive lending practices and diversion of funds into property speculation. Some market chatter has also suggested that retail punters have used online consumer loans to finance stock market investment.
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