China stock rout spreads amid fears of foreign investor exodus

A rout in Chinese shares in the crosshairs of Beijing’s regulatory crackdown extended into the bond and currency markets Tuesday as unverified rumors swirled that US funds are offloading China and Hong Kong assets.

The speculation, which included talk that the US may restrict investments in China and Hong Kong, circulated among traders in late afternoon in Asia, spurring a renewed bout of selling. The Hang Seng Tech Index, a gauge of many Hong Kong-listed Chinese stocks, plunged as much as 10%, while the yuan slid to its weakest since April against the dollar and even Chinese bonds were dumped.

The drastic moves underscore how fragile investor confidence has become after a monthslong regulatory onslaught by Beijing that only seems to be getting worse. Traders fear the latest crackdown on the nation’s education, food delivery and property sectors could expand to other industries such as health care, as China looks to tighten its grip on Big Tech and reduce the wealth cap.

“The spread of declines from the Chinese equities space into the yuan signals that the concerns over regulatory risk in China might have taken a turn for the worst,” said Terence Wu, foreign-exchange strategist at Oversea-Chinese Banking in Singapore.

Bond Pessimism:

Treasuries climbed with the greenback and the yen as investors sought havens. The yield on China’s most actively traded 10-year government notes rose seven basis points to 2.94%, the most in a year. The offshore yuan fell as much as 0.6% to 6.52 per dollar and one-month volatility in the currency pair posted the biggest jump since May.

“Although we can’t verify if it’s true or not, the market fears that foreign capital will flow out from the Chinese stock market and bond market on a large scale, so sentiment is badly hurt,” Li Kunkun, a trader from Guoyuan Securities said of the speculation.

Vibrant Sectors:

Investors in some of China’s most vibrant sectors -- from technology to education -- have found themselves in the firing line this month as Beijing attempts to rein in private enterprises it blames for exacerbating inequality, increasing financial risk and challenging the government’s authority. A seeming acceptance of short-term pain for stockholders in pursuit of China’s longer-term socialist goals is a rude awakening investors.

“The key concern now is whether regulators will do more and expand the crackdown to other sectors,” said Daniel So, strategist at CMB International Securities. “The regulatory concerns will be the key overhang to the market for the second half.”

Technology and education shares retreated once again Tuesday while property stocks also fell. Tencent Holdings  slumped 9%, most in about a decade, after the company’s music arm gave up exclusive streaming rights and was hit with fines. Meituan fell as much as 18%, its biggest decline ever. Turnover on Hong Kong’s main equity board reached a record high of HK$361 billion ($46 billion). The Hang Seng Index slid 4.2%, the most since the global financial crisis.

Regulatory Crackdown:

Stocks had tumbled in “panic selling” after regulators on Saturday published reforms that will fundamentally alter the business model of private firms teaching the school curriculum. Hong Kong’s major retail brokers lowered margin financing for battered Chinese education stocks as investors suffered steep losses.

“There is no anchor for us to justify the stock valuations now given the regulation uncertainties,” said Dai Ming, a Shanghai-based fund manager. “In the past, the market was expecting normal regulations on certain sectors, but now it looks like the government can even tolerate killing a whole industry or some leading companies when it’s needed.”

Dollar resumes climb as risk appetite fades

The US Dollar resumed its march towards a 3-1/2 month high as a Fed policy meeting got underway with risk appetite broadly subdued, leaving the Australian dollar and the Chinese currency struggling due to a widening regulatory crackdown in China. Against a basket of its rivals, the greenback was trading 0.2% higher at 92.80, within striking distance of an early April high of 93.19 hit on July 21. The dollar has rallied more than 4% from 2021 lows of below 90 hit in late May as a sudden drop in treasury yields forced investors to cut their short dollar bets

WeChat suspends new user registration

Tencent's WeChat has temporarily suspended registration of new users in mainland China as it undergoes a technical upgrade "to align with relevant laws and regulations", China's dominant instant messaging platform said on Tuesday.

"We are currently upgrading our security technology to align with all relevant laws and regulations," the company said in a statement. "During this time, registration of new Weixin personal and official accounts has been temporarily suspended. Registration services will be restored after upgradation”, it added.