Chinese stocks tumbled on Wednesday, as fears that the government plans to rein in commodity prices weighed on metals shares, while foreign investors continued to sell ahead of a policy decision from the U.S. Federal Reserve. An across the board miss across all economic data merely confirms that the deflationary tidal wave sparked by China's plunging credit impulse is getting worse by the day.
China's benchmark CSI 300 Index closed down 1.7%,as declines in material and technology stocks offset a rally in financial and energy companies. The tech-heavy ChiNext tumbled more than 4%, dropping below the 3,200 level that had supported the gauge’s rally this month. Hong Kong’s Hang Seng Index slipped 0.7%, led by automakers and technology shares.
The selloff was sparked by a report that Beijing has stepped up its campaign to rein in soaring commodity prices and reduce speculation in a bid to contain soaring raw material costs. As Bloomberg reported, "state-owned enterprises were ordered to control risks and limit their exposure to overseas commodities markets by the State-owned Assets Supervision and Administration Commission." The companies have been asked to report their futures positions for Sasac to review, the Bloomberg sources added.
In a second development to hammmer commodity prices, the National Food and Strategic Reserves Administration will soon release state stockpiles of metals including copper, aluminum and zinc, the agency said in a statement Wednesday. The metals will be sold in batches to fabricators and manufacturers, it said, without giving the volumes to be released. The news comes as spot copper has dropped to a 7-week low.
Metals prices in London and Shanghai fell, as did the Singapore Exchange’s iron ore contract. Shares of metals companies in China and Hong Kong declined, while Australia’s metals and mining sub-index posted its biggest loss in almost a month.
"We haven’t seen the country release state reserves for years,” said Jia Zheng, a commodity trader with Shanghai Dongwu Jiuying Investment Management Co. "This will boost short-term supply, sending a bearish signal to the market." The scrutiny on overseas commodities positions, meanwhile, is aimed at “curbing excessive speculation as prices are overheated and could bring risks to SOEs,” said Jia.
The news sparked a broad market selloff, with the metals subgauge slumping 3.1%, its biggest drop in about a month. Meanwhile, the government’s crackdown on drugmaker monopoly practices also hit health-care shares, leading to a 3% drop in that sub-index.
Separately, today’s drop started before China released reports on retail-sales growth and property investment in May, which missed expectations across the board, with May industrial production coming in at +8.8% yoy, missing expectations of 9.2%, as automobile manufacturing continued to be a drag on overall IP. Retail sales growth also slowed to 12.4% yoy, missing the 14% consensus estimate as slower online goods sales reflected delays of some purchases related to the online shopping festival in June. Finally, fixed asset investment growth missed expectations as well - property and infrastructure investment slowed in May. Surveyed unemployment fell slightly on a nationwide basis, but was stable in major cities.
Here are the main numbers:
- Industrial production (IP): 8.8% yoy in May, below consensus: +9.2% yoy. April: +9.8% yoy.
- Retail sales: 12.4% yoy in May, below consensus: 14% yoy; April: +17.7% yoy.
- Fixed asset investment (FAI): 15.4% ytd yoy in May, below consensus: +17% ytd yoy; May single month: +5.6% yoy, vs. April: +10.8% yoy.
A detailed breakdown of the data from Goldman's economists:
- May industrial production increased 8.8% yoy, below consensus expectations. Production in pharmaceuticals and computers accelerated in May, though automobile production continued to be the major drag to IP growth, reflecting semiconductor shortages.
- Fixed asset investment (FAI) growth slowed in May, below expectations. Manufacturing investment remained relatively solid and rose 13.7% yoy in May (vs. 14.2% yoy in April). Property investment growth moderated further to 9.8% yoy in May (vs. 13.7% in April). Infrastructure investment growth was lower at 0% yoy in May (vs. 5.4% yoy in April). On a two-year average basis, FAI increased 4.7% per year from May 2019 to May 2021, slower than +5.4% in 2019.
- Retail sales growth was also below market expectations. Sequentially it rebounded 1.7% mom in May after seasonal adjustment, following a sequential contraction of 4.5% in April. On a real basis, retail sales growth in May moderated to 10.1% yoy from 15.8% yoy in April. Automobile sales rose 6.3% yoy (vs. 16.1% yoy in April). Catering sales rose 26.6% yoy in May (vs. +46.4% yoy in April). On a sequential basis, catering sales accelerated to +3.2% non-annualized sa in May (vs. +0.5% in April). Online goods sales growth (included in total retail sales) decelerated to +9.7% yoy in May (vs. +15.7% yoy in April), possibly reflecting postponement/back-loading of some purchases to the June 18th online shopping festival. The Services Industry Output Index, which is on a real basis and also tracks tertiary GDP growth closely, rose +12.5% yoy in May (vs. +18.2% yoy in April; average annual growth +6.6% yoy in May over the past 2 years). In sequential terms, it rose 1.0% mom sa non-annualized in May.
- Property sales volume moderated to 9.1% yoy (vs. +19.2% in April) while housing completions rebounded to 10.1% yoy in May (vs. -3.1% in April). The decline in housing starts narrowed to -6.1% yoy in May from -9.3% yoy in April. Building material sales moderated to +20.3% yoy (vs. +30.8% in April). Furniture sales and home appliance sales slowed further to 12.6% and 3.1% yoy in May, respectively (vs. 21.7% and 6.1% in April).
- On labor market, the nationwide survey-based unemployment rate fell further to 5.0%, though 31-city surveyed unemployment rate remained unchanged at 5.2% in May. Unemployment rate for labor without local hukou also moderated to 5% in May from 5.1% in April.
Looking ahead, Goldman concludes that the local outbreak of coronavirus and related control measures in Guangdong likely weighed on activity growth temporarily in June. Nonetheless, the bank continue to expect more recovery in consumption later in the year, and export growth remains resilient in the second half of the year.
There was more bad news for traders as Chinese foreign investors sold a combined 405 million yuan ($63 million) worth of mainland shares on a net basis, the third consecutive day of selling A shares, Bloomberg-compiled data show. The exodus also comes as the Chinese yuan’s rally stalls with Bloomberg's Jeanny Yu noting that the yuan is trading around the level of 6.4 versus the greenback as investors adopt a wait-and-see attitude ahead of the Fed decision.
“The Fed signaling that it will taper QE could cause the yuan to depreciate versus the dollar and Treasure yields to rise, which will have a relatively big impact on A shares,” said Yan Kaiwen, analyst at China Fortune Securities. “Investors are focusing on limiting risks in their portfolio before the FOMC meeting.”
What does this mean for stocks? Nothing good, and certainly nothing that China's tumbling credit impulse hadn't already warned about.
“I think this marks the beginning of a months-long correction,” said Wu Xuan, chief strategist at Tebon Fund. “The stocks worst hit today are those in EVs and other sectors that recently reached fresh highs. The high volumes ahead of the dragon boat festival holidays shows that some larger funds may have been offloading to prepare for a downturn in risk appetites in the second quarter.”