Stocks, Bonds Slip After China Loosens Grip

Chinese markets suffered a broad selloff Monday, losing some of the shine they maintained during last week's major congress of the Communist Party.

The country's $9 trillion bond market led the losses. Benchmark government bond prices reached a fresh three-year low as perceptions grow that Beijing will intensify efforts to cut back high levels of leverage in China's economy during President Xi Jinping's second five-year term as party leader.

Those concerns spread to the stock market, with shares in Shanghai snapping a six-day winning streak. Prices of commodities futures, from copper to iron ore, also headed south on China's domestic markets.

During the leadership gathering last week, Beijing stage-managed an artificial calm in China's stock markets with purchases by state-backed investment funds and unofficial bans on excessive selling by big investors.

Market participants said the preoccupation with preserving stability--known locally as wei wen--had been expected to fade following the conclusion of the congress. "Now that the Party Congress is over and the need to wei wen has eased, people have come to the conclusion that the authorities will focus back on the campaign to reduce financial leverage," said Qin Han, chief fixed-income analyst at Guotai Junan Securities.

The bond market's gradual selloff started as early as Wednesday, after China's central bank ended a six-day streak of injecting cash into the financial system. "That was a strong signal that the central bank has no intention to cheapen borrowing costs," Mr. Qin said.

The losses in bonds have since intensified, pushing the yield on the benchmark 10-year government bond to a fresh three-year high of 3.93% on Monday.

The world's third-largest bond market has come under pressure at times this year, as Beijing raised short-term interest rates and tightened liquidity to discourage borrowing by speculative investors. The latest selloff in the government bonds came days after Beijing issued $2 billion worth of dollar-denominated bonds offshore for the first time in more than a decade.

The bond selling worsened the mood among China's stock investors, pushing the Shanghai Composite Index down by as much as 1.7% in the morning. The index has since narrowed its losses to close down 0.8%.

Analysts said state-backed funds--known as the "national team"--had been in the market buying large-cap stocks to help prop up the market. "It's clear that state funds were propping up the index by buying banks and oil [company] shares to ease the selloff," said Zhang Xin, an analyst at Guotai Junan Securities. "The main goal in the market is still to ensure stability."

Zhang Gang, a senior analyst at Central China Securities, said this time stocks are falling instead of rising while bonds are tumbling "because the fear is that the central bank will only tighten, rather than loosen, monetary policy."

He said another sign things are back to business as usual for Chinese authorities was the securities regulator's latest approval of a larger-than-usual amount of fundraising via new share offerings.

The China Securities Regulatory Commission announced Friday that it had given the green light to nine companies to raise a combined 9.5 billion yuan ($1.4 billion) via initial public offerings. This more than double the 4 billion yuan approved a week earlier.

Meanwhile, the market contagion also spread to China's notoriously volatile commodities futures, partly hit by Beijing suggestion it will focus less on the speed of economic expansion, which has driven the nation's economic policies for decades, and more on the quality of growth.

Weaker state-led investment in fixed assets such as infrastructure projects would result in lower demand for raw material such as metals. The benchmark iron ore futures contract on the Dalian Commodity Exchange was down 3.3%, while copper futures traded in Shanghai lost 1.5%.

Yifan Xie contributed to this article.

(END) Dow Jones Newswires

October 30, 2017 05:34 ET (09:34 GMT)