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China's Market News: Chinese Equities Plunge on Fear of Tightened Wealth Management Rules

China's Market News: Chinese Equities Plunge on Fear of Tightened Wealth Management Rules

Renee Mu, Currency Analyst

This daily digest focuses on market sentiment, new developments in China’s foreign exchange policy, changes in financial market regulations and Chinese-language economic coverage in order to keep DailyFX readers up-to-date on news typically covered only in Chinese-language sources.

- Chinese stocks tumbled on Wednesday as investors worried about tightened restrictions on Wealth Management Products.

- The ruling party’s Politburo vowed to curb asset bubbles after the top meeting.

- The government official news agency warned against aggressive stimulus measures.

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Plunge in Chinese equities (from multiple sources: Hexun, Sina)

- Chinese stocks tumbled on Wednesday following the release of draft rules from the banking regulator that would ban wealth management products (WMP) investing in domestic equities. The ChiNext board, tracking small technology companies, dropped the most, down -5.45%. The Shenzhen Composite Index fell -4.11% and the Shanghai Composite Index lost -1.91% during the session. In the draft’s new rules, banks will be only allowed to invest Wealth Management Products in money or bond markets, generally carrying lower risk. However, many banks have been purchasing stocks in the effort of maintaining relatively high returns on their WMP’s and, in-turn, attract customers. The fear being driven by banks’ withdrawal from the equity market triggered panic selling during yesterday’s session.

China Banking Regulatory Commission intends to tighten regulations on Wealth Management Products as sales have been booming over the past few years. According to the 2015 China WMP Annual Report from China Central Depository & Clearing Co., the outstanding value of WMP’s in China has hit 23.50 trillion Yuan as of the end of 2015, increasing by +56.46% from a year ago. This has raised the regulator’s concerns around increasing credit risks. The proportion of WMP’s invested in equities and non-standard credit assets were 7.84% and 15.73% respectively, which means that roughly 5.5 trillion Yuan in Wealth Management Products were invested in unqualified categories according to the new draft’s rules. If the new rules come into effect, it may not only impact existing WMP’s but would also alter the outlook of capital flows into equity markets, which could drive Chinese stocks further lower.

The draft rules are not final deals as they are pending for banks’ review and may be subject to revisions. With elevated turbulence in the equity market around the news, the regulator may need to balance the equity market’s stability with its regulation targets.

- The announcement after China’s Politburo meeting on July 26th might also contribute to volatility in the equity markets. The ruling party’s Politburo vowed to ‘curb asset bubbles’ in the meeting, which was rarely seen in the past. This may have exacerbated speculators’ selling in the last session. The emphasis on curbing asset bubbles could have some long-term impacts as well: A) It further reduces the likelihood of the PBOC introducing even more loosened monetary policy. Rather, the country will more likely rely on fiscal policy in the second half of 2016. B) Regulators may soon introduce tightened rules in the effort of curbing the soaring prices in the real estate sector. On July 27th, a land auction in Shanghai released $8.8 billion Yuan, the highest total for a sale of land in 2016 in the region.

Xinhua News: theChinese government’s official news agency.

- The news agency issued three commentary articles in three consecutive days to address China’s economic conditions.

In the piece of Correctly Understanding China’s Fundamentals published on July 25th, the news agency stated that “China’s fundamentals are improving but not strong enough to support a stable growth. The economy still feels the pain of reforms. New momentums driven by innovations are developing but cannot fully substitute the old momentums. In the second half of 2016, China will still face downward pressure with challenges in macro management.”

On July 26th, the news agency discussed in detail China’s difficulties: “China’s exports contributed to -10.4% to China’s growth in the first half of 2016. The growth in private investment dropped to 2.8%, indicating a lack of domestic opportunities. As UK’s divorce with the EU is moving forward, China may also bear increasing pressure from the outside. Despite such a tough situation, China should not introduce aggressive stimulus measures, or it will make the condition even worse.”

On July 27th, the news agency talked about the proper strategy for China to implement over the following periods: “China is like a hybrid car, with both the old diesel engine and the new electric engine. In order to promote the new engine, China needs to continue to conduct supply-side reforms in manufacturing sectors as well as promote innovations in high-tech industries.”

China Finance Information: a finance online media administrated by Xinhua Agency.

- The onshore Chinese Yuan extended its rally against the US Dollar for the third consecutive day on Wednesday. The PBOC fixed the daily reference rate +107 pips or +0.16% stronger on the day. The offshore Yuan, on the other hand, lost slightly against the US Dollar in the morning session. China’s Politburo that China will keep the Yuan steady and maintain the exchange rates within a reasonable range.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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