Aurelia Butler

SHANGHAI/SINGAPORE (Reuters) -Investors are making a tentative return to China’s beaten-down stock markets as the government opened the stimulus taps, including pressing a national fund for support, but they remain mindful the economy and sentiment are still fragile.China’s benchmark CSI300 Index staged a moderate rebound from 4-1/2-year lows this week, after state fund Central Huijin Investment started buying exchange-traded funds (ETFs) on Monday, adding substance to the central bank’s pledge over the weekend to fend off financial risks. Investors were also excited by Tuesday’s approval of an additional 1 trillion yuan ($136.76 billion) of sovereign bond issuance.Drawing investors back into China’s $10.5 trillion stock market, particularly the foreign buyers that have fled in droves this year, would stem further slides in a market which fell to its lowest since 2019 earlier this week. The policy efforts could also halt capital outflows and ease the yuan’s depreciation and a stronger market could help fund a rejuvenation of the world’s second-largest economy. The fiscal stimulus “is injecting some confidence to an extremely pessimistic market that saw no hope in the economy,” said Huang Yan, fund manager of Shanghai QiuYang Capital Co.QiuYang added some positions this week for short-term bets, but remained defensive as “the market needs time to find bottom”, Huang said.Still, the rebound in China stocks was modest and trading remained thin, underlining Beijing’s challenge in reviving confidence dented by a stop-go economic recovery, a deepening property crisis, and heightened geopolitical tensions. Huang is also wary of another selloff since further falls in stock prices could force leveraged investors to sell when they face margin calls. The CSI300 index is down 18% from its peak this year in January while China’s currency is down nearly 6% so far in 2023.This weekend the government gave a clear sign of market support when People’s Bank of China Governor Pan Gongsheng said China would prevent risk contagion in the stock, bond and foreign exchange markets, and ensure stability.”China’s central government is endorsing the stock market,” said Qi Wang, chief investment officer of UOB Kay Hian’s wealth management division in Hong Kong.”We see tactical opportunities” over the next few months, he said, citing some improvements in China’s economy, the Sino-U.S. relationship, and fresh stimulus. But “I dare not say we are already at the bottom.” Enlisting Huijin underscored the Chinese government’s seriousness about propping up the market after earlier piecemeal measures such as a cut in the stamp duty, reductions in trading fees, short-selling restrictions and curbs on share sales by listed companies’ large shareholders.That support showed in markets this week as several ETFs, including the PB CSI 300 ETF and E Fund CSI300 Index ETF saw heavy inflows after Huijin announced its purchases in a statement, adding it would continue to do so.China Asset Management Co (AMC) said Huijin bought an estimated 10 billion yuan ($1.37 billion) of ETFs on Monday, and continuous buying would “effectively ease liquidity shortage and help stabilise markets.”Huijin last bought ETFs during the 2015 stock market crash, and during the money market liquidity crunch in 2013. “The Shanghai stock indices were higher by more than 20% in three months both times”, analysts at Singapore’s United Overseas Bank (OTC:UOVEY) wrote.Even without the policy moves, some overseas investors are slowly coming back to Chinese stocks. UK-based M&G Investments, which manages about $385 billion for individual and profession investors, is adding to its Chinese investments and likes sectors including automotive, renewable and shipping, said Fabiana Fedeli, M&G’s global CIO for equities, multi-asset, and sustainability.”We do find opportunities in China, and opportunity is created by the fact that this market has been unloved for some time,” Fedeli said.Still, China’s stock markets have to overcome earlier heavy selling from foreigners, burnt by Xi’s previous crackdowns on internet companies and other sectors, and its earlier stringent zero-COVID policy. Goldman Sachs estimates forex outflows from China rose to $75 billion in September, 80% higher than in August and the biggest monthly amount since 2016. ($1 = 7.3149 Chinese yuan renminbi) More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Like shoppers, investors are often prone to the so-called left-digit bias — the tendency to place more emphasis on the leftmost digit of a price. Indeed, when the 10-year US Treasury bond yield — a benchmark used to price assets in America and across the world — surged from the high fours to 5.02 per cent on Monday, it caused a stir in financial markets. Yields have now swung back, but still hover at post-global financial crisis highs.Breaching the 5 per cent barrier for the first time since 2007 is a marker of how tight financial conditions are becoming in the US Federal Reserve’s rate-raising cycle, and the growing squeeze ahead for the US economy. The 10-year Treasury yield has risen more than 3 percentage points in the past two years. The high volatility and speed of the sell-off in recent weeks, at a time when liquidity in Treasury markets “remained challenged”, according to a Fed report last week, is concerning too.There are several drivers behind the recent jump in 10-year yields, which are up from 4.6 per cent in mid-October. First, investors have cottoned on to the Fed’s “higher for longer” narrative on rates, particularly as a slew of strong economic data has backed up its rhetoric. Second, the “term premium”, or the additional yield investors need to compensate for holding long-term bonds, has probably risen, according to analysts.The US government’s widening deficit has driven higher bond issuance, while rising spending needs and political turmoil are raising expectations for future Treasury supply too. But demand has fallen, particularly with the Fed shrinking its Treasury holdings via quantitative tightening. Belief that the underlying interest rate could be higher in the long term is also growing. This is pushing up yields, but uncertainty also remains high. While 10-year yields have been on an upward march since the Fed began raising rates, intraday swings are common. Elevated yields could exacerbate fiscal concerns, with spending on interest payments rising. Mortgages and corporate bonds, which are linked to long-term Treasury yields, will become costlier. Stock valuations could be strained. Together, this raises the chance of a deeper and longer economic slowdown, which could pull down yields. Indeed, market skittishness poses its own risks, particularly when Treasury liquidity remains below historic norms. Investors looking to lock in high yields may be reticent to buy if they think prices could fall further. The risk of sharp yield movements could also threaten institutions holding large bond losses, and stoke distressed Treasury sales. The volatility is an inevitable consequence of investors trying to price Treasuries amid heightened uncertainty and following years of the Fed’s bond-buying. The lack of clarity on the economic outlook means a convincing narrative to anchor yields is also far off. Policymakers ought to be alive to the risks of something snapping in financial markets — and can also help to bring stability.For the Fed, higher Treasury yields will obviate the need for further rate rises at next week’s rate-setting meeting. Outlining a clear vision for the economy will, however, be difficult. Jay Powell, the Fed chair, should at least be measured in his communications to avoid adding to the jitters. Monitoring Treasury market liquidity, and efforts to enhance it, will remain important as well.Above all, the US needs to display fiscal prudence. The deficit as a share of gross domestic product is projected to balloon. Higher debt issuance in a market short of buyers will keep upward pressure on yields. Paralysis in the US Congress does not help. High rates, allied with lax fiscal policy and political chaos, are a recipe for a vicious cycle of rising government yields — as Britain can attest from its turmoil a year ago. But if the US has its own Liz Truss moment, the damage will not be contained to its shores.  More