Analysts See Deleveraging Concerns Behind China’s Equity Selloff

Liquidity concerns sparked Monday’s tumble in Chinese equities, according to strategists, who pointed to surging bond yields, the nation’s ongoing deleveraging campaign and an acceleration in IPO approvals as reasons for the declines.

The Shanghai Composite Index fell as much as 1.7 percent, while small-caps were even harder hit, with the ChiNext gauge tumbling as much as 2.5 percent. Shares pared declines in late morning trading. The 10-year yield climbed six basis points to 3.90 percent, a three-year high.

Here’s what some analysts had to say about the sudden drop:

ICBC International Research (Qiu Zhicheng)

-“The surge in China’s government bond yield last week and expectations for tighter financial regulation have triggered concerns over tighter liquidity”
-“This prompted the slide in small caps as their valuations are still expensive, and thus they are more sensitive to changes in liquidity conditions”

CMB International Securities (Daniel So)

-“Yields are rising. If funding in the market is tight, the more volatile ChiNext will come under pressure”
-“Hong Kong stocks have been dragged down by China”

Northeast Securities (Shen Zhengyang)

-It would be hard for the index to extend gains from this level without a material amount of new funds entering the market, but liquidity is still tight
-As most companies have reported results, it’s hard to see further catalysts in the near future

Central China Securities (Zhang Gang)

-Correction is triggered by investor concerns about the acceleration of IPOs
-“Investors are not optimistic on the earnings of small caps, which lead to the panic selling of smaller firms this morning”
-NOTE: Friday, China CSRC Gives Written IPO Approval to Nine Companies

Bocom International Holdings (Hao Hong)

-The pessimism in the bond market is spilling over to stocks
-In the near term, bonds will keep being pressured as China will likely keep its monetary policy relatively tight, and that means small firms will suffer while big caps stay more resilient

KGI Asia (Ben Kwong)

-“After the 19th Party Congress, the central government is inclined to tighten regulation and continue deleveraging, so people expect monetary policy to be relatively tight”
-“With funding tightening, the market will be more sensitive”
Source: Bloomberg