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Worries of US-China trade war hits markets

For overseas investors, a weaker currency is the latest factor making yuan-denominated assets less attractive.

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Expectations that $200 billion of foreign money would flow into China's capital markets this year are looking nothing short of optimistic.For overseas investors, a weaker currency is the latest factor making yuan-denominated assets less attractive. They've been selling mainland-listed stocks at a record pace and their demand for Chinese bonds has been relatively tepid: monthly inflows have averaged at just 6.8 billion yuan ($984 million) this year, versus the 44.4 billion yuan seen in 2018, ChinaBond data show. What had started as a promising year in China's markets is quickly turning sour as the country's trade stand-off with the US takes a toll on sentiment. The swift correction in stocks and concern that the yuan could tumble to dangerous levels is creating volatility in a market that -- for foreign investors -- remains difficult to hedge. It comes at a sensitive time for policy makers, who have been accelerating efforts to open the country's financial sector to the world. Sydney-based Nader Naeimi, who started selling China equities in April, said he won't be lured back until China's economic data significantly improves or the government announces large fiscal stimulus.
"There are a lot of options outside China," said Naeimi, who oversees about $1 billion at AMP Capital Investors Ltd., adding that foreigners remember last year's rout and the current volatility might keep them away. "It's two years in a row we've seen that -- starting well and then a big crash."The Shanghai Composite Index, which was up more than 30% for the year at its peak in April, has given up about a third of those gains and trading volume keeps dwindling. More than 42 billion yuan of A shares have been sold through trading links with Hong Kong in May, more than double the monthly record set in April.The offshore yuan has declined about 3% against the dollar this month and investors are debating whether it will weaken past 7 for the first time since the financial crisis. A breach of that level could result in consequences from financial instability to a deterioration in China's balance of payments and derail efforts to open capital markets, according to Citigroup Inc. Investors should be cautious about capital outflows given expectations the yuan will fall more, Jianghai Securities said in a note dated Monday.While risk-off environment in China has helped government debt rebound since April, foreign flows into the nation's bond market are lagging expectations. Overseas investors bought just $2.7 billion worth of Chinese notes last month even as sovereign debt was included in a major global index for the first time. Inflows would need to pick up significantly to reach Societe Generale SA's forecast of as much as $100 billion in the 12 months after inclusion.



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