China’s sweeping new plan to rein in its shadow banking industry rippled through the nation’s stock market on Monday, sending the Shanghai Composite Index to a two-month low.
Investors pushed the benchmark gauge down as much as 1.4 percent amid concern that the government’s latest attempt to tighten supervision of $15 trillion in asset-management products will siphon funds from the market. Developers and brokerages paced losses.
While analysts applauded the plan as an important step toward curbing risk in China’s financial system, they also warned of turbulence as markets adjust to outflows from popular shadow-banking products. The government directives, which are set to take effect in 2019, add to signs that President Xi Jinping is willing to sacrifice growth as he tries to put the world’s second-largest economy on a more stable financial footing.
“The rules dealt a blow to the market,” said Zhang Gang, a Shanghai-based strategist with Central China Securities Co. “A lot of such products had positions in the equity market, and those that don’t qualify under new rules may choose to exit some small and medium caps.”
The Shanghai Stock Exchange Property Index dropped 1.3 percent, with Gemdale Corp. losing as much as 2.6 percent and Poly Real Estate Group Co. declining 3.2 percent. China Vanke Co. sank as much as 4.9 percent in Shenzhen. A measure of securities firms fell to a five-month low, with Citic Securities Co. tumbling 3.7 percent.
Banks were among the biggest laggards on the Hang Seng China Enterprises Index in Hong Kong, with Industrial & Commercial Bank of China Ltd. down 0.8 percent and China Construction Bank Corp. slipping 1 percent. The Shanghai Composite Index was 0.8 percent lower as of the mid-day break, while the Shenzhen Composite dropped 0.5 percent. The ChiNext measure pared a drop of as much as 2.1 percent to rise 0.1 percent.
“The regulatory tightening on private products is likely to deepen the stocks correction,” said Huang Wentao, Beijing-based analyst at China Securities Co. “For bonds, the recent slump has fully reflected the expectation of supervisory tightening, so they are less likely to see further tumbling.”
China’s sovereign bonds showed muted moves on Monday, with the benchmark 10-year yield edging one basis point higher to 3.97 percent. The yield has surged 24 basis points since the end of a Communist Party Congress on Oct. 24 amid rising inflation and concern that policy makers will intensify a deleveraging campaign.
Here are the key takeaways from analysts and investors on the new rules announced Friday:
- This adds to evidence that containing financial risks is a priority for President Xi after he cemented his grip on power at the party congress
- The rules may bring an end to popular short-term investment products that offer fixed rates of return; returns from new products will fluctuate and more accurately reflect the risks of their underlying assets
- Uniform guidelines for banks, trusts, insurers, fund managers and brokerages will help prevent regulatory arbitrage
- The move to end implicit guarantees is welcome, but it could spur outflows and weigh on domestic securities markets
- Smaller banks are more vulnerable to a loss of off-balance sheet funding than larger ones
- A grace period through June 30, 2019, will help contain market fallout and give financial institutions time to prepare
- Watch for follow-through; authorities have clamped down on shadow banking before, only to ease up because they feared an economic slowdown
Also Monday, consumer staples were the worst performers on the big-cap CSI 300 Index, extending a selloff from Friday after the official Xinhua News Agency called for Kweichow Moutai Co. shares to rise at a slower pace. Kweichow and Wuliangye Yibin Co. declined at least 3 percent.
— With assistance by Amanda Wang, and Helen Sun
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