Yuan, Chinese stocks slide after Beijing moves on repo risks
Bloomberg
SHANGHAI - China's stocks, currency and corporate bonds suffered their largest tumbles in years Tuesday after Beijing took fresh steps to rein in growing risks in the country's debt-laden financial system.
The selloff started in the bond market, as traders rushed to sell and raise cash after a regulator banned investors from using low-grade corporate debt as collateral to borrow cash. The turmoil then spread to the yuan , which recorded its biggest two-day tumble ever. Later, the benchmark Shanghai index slumped 5.4% to record its biggest fall since 2009.
The sudden moves serve as a reminder to global investors about the country's shaky finances just as China opens up its capital markets further to overseas cash. Policymakers gathering in Beijing this week for a key summit are signaling to the investing public they should prepare for a lengthy period of slower economic growth after years of binging on debt to fuel high growth levels.
The slump in the stock market was especially stark, though not entirely unexpected after it had surged in the past weeks to become the world's top performing index. Retail investors had fuelled the rally, flocking back to stocks after once-popular investments like high-yielding wealth management products and gold have turned sour and left them with few other investing options.
'I was actually doing a presentation in my office during the last 10 minutes of trading, when my boss asked to me to stop and asked everyone to look at stock prices. Then I saw the incredible fall of the Shanghai index and my stocks that have turned from black to red in just a few hours,' said Wu Yunfeng, a Shanghai-based retail investor.
The trigger for the broad selloff Tuesday was the country's securities clearing house saying late Monday it had raised the threshold for corporate bonds qualifying as collateral for repurchase agreements, or repos, which are short-term loans with maturity spanning from overnight to 182 days. These are used as a key channel of short-term funding for bond investors.
'The new rule is to prevent risks from building up further as a result of high leverage in the market,' said Xu Hanfei, analyst at Guotai Jun'an. Xu added that the combined outstanding value of repos on the country's two exchanges has surpassed 700 billion yuan ($113.47 billion).
According to estimates by Shenyin Wanguo Securities, the total value of corporate bonds disqualified as repo collateral under the new rule exceeds 1.25 trillion yuan, or 60% of all outstanding corporate bonds listed on the two stock exchanges.
The move to cut down on the use of this risky debt is central to Beijing's structural reforms to help sustain economic growth over the longer term by reducing the reliance on state investment and exports and boost the role of consumption. That policy shift though could hold back expansion in the short term if it chokes off credit to industries such as steel and cement, where problems with overcapacity are already widespread.
The People's Daily, the Communist Party's flagship newspaper, gave prominent treatment to a report proclaiming slower growth was a 'new normal' while it published a lengthy commentary from a top government think tank saying structural reforms and better-quality growth were the key economic objectives.
Late last month the central bank cut interest rates for the first time in over two years, accelerating the rally in the stock market on bets Beijing was keen to bolster slowing growth. But the reports in the official media Tuesday could be a sign that the government will tolerate slower growth.
In its statement, the country's securities clearing house said the new rule also applies to bonds issued by local government financing vehicles that aren't explicitly covered by local authorities' budgets.
That follows a series of measures taken by the Chinese authorities to impose tougher financial discipline on local governments and keep their debt levels in check. In early October, China's cabinet said Beijing won't bail local governments out when they fail to repay their debts and will impose ceilings on their borrowing.
China's local governments have taken on huge debts in recent years to fund infrastructure projects since Beijing opened the credit spigot to combat the global financial crisis.
They have had a tough time this year repaying debt as fiscal revenue growth has slowed in the face of a weaker national economy and China's property market downturn.
Almost 40% of the 17.9 trillion yuan in local government debt and guarantees will mature by the end of this year, placing huge pressure on local governments to make repayments, according to a report released by the state auditor late last year.
Write to Shen Hong at hong.shen@wsj.com
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