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China led the recovery trade; Almost everyone is careful now

(Bloomberg) – Regardless of the asset class, the outlook for China’s financial markets is bleak. The country’s stocks, bonds, and currencies are losing their luster after a formidable start to the year, overshadowed by a stronger dollar and higher yields on US Treasuries and a domestic campaign to reduce financial risk. China’s benchmark index remains 13% below a 13-year high in early February after a brutal sell-off wiped out more than $ 1.3 trillion in market value. The yuan just suffered its worst month in a year in March, wiping out all of its 2021 gains against the greenback. Chinese government bonds, a haven during the recent global crisis, led foreign investors to cut their holdings last month for the first time in more than two years. The sharp reversal of luck came as confidence grew in a strong rebound in the US economy that is recapturing the appeal of dollar assets around the world. The recent underperformance in Chinese markets also resulted from Beijing’s decision to resume a debt war interrupted by the trade war with Washington and the pandemic. Concerns over inflation and tightening monetary conditions mean that appetite for Chinese stocks is likely to remain subdued, while that of the country’s sovereign debt market is set to test a supply glut later this year, investors and analysts say. The yuan could weaken further if the dollar extends its global resurgence. “China’s bull run is being tested,” said Adrian Zuercher, head of global asset allocation for UBS’s Chief Investment Office. “Volatility will remain high for the near future.” Subdued trading After rallying the world’s best at the beginning of the year, Chinese stocks have reversed their course since February, when it became increasingly clear that policymakers were prioritizing taming Asset bubbles and the reduction of financial values ​​shifted leverage. The broader risk reduction campaign also includes crackdown on the internet and the country’s fintech giants. In the latest such measures, the authorities imposed a record $ 2.8 billion fine on Alibaba Group Holding Ltd. over the weekend. imposed after an anti-monopoly investigation found it had abused its dominance. While the penalty sparked a relief rally of up to 9% on Alibaba’s shares in Hong Kong, shares of its peers, including Tencent, JD.com and Baidu, fell at least 2.7% amid fears they would be among the next few targets could belong to the crackdown on Beijing. The onshore benchmark index CSI 300 fell 1.4% on Monday, bringing the year-to-date loss to 4.7% and 14.5% from its February high. The world’s second largest stock market is $ 838 billion smaller than its February high, and trading interest has subsided. Average daily turnover on the two Chinese stock exchanges so far this month has been 670 billion yuan ($ 102 billion). This is the lowest level since May. This is based on data compiled by Bloomberg. UBS’s Zuercher believes that rising government bond yields will be a major source of near-term volatility in China’s equity market as it continues to put pressure and rotation on valuations of the country’s growth stocks. Herald van Der Linde, head of equity strategy for Asia Pacific at HSBC Holdings Plc, said there is still downside risk to Asian equities in the near future and “China is no exception”. Domestically, a central bank unwilling to keep funding terms too loose has also disappointed equity investors unlike its peers in other major economies. Aside from its debt relief campaign, signs of inflationary pressures, as demonstrated by the cross-consensus increase in Chinese producer prices of 4.4% in March, could lead Beijing to further reduce its pandemic-induced economic stimulus: “We believe monetary policy could be tightened.” Hanfeng Wang, strategist at China International Capital Corp., wrote in a note this week that investors should heed the political signals of the next meeting of the Politburo, the highest decision-making body of the Communist Party, outperforming its peers in the first quarter as it outperformed its peers due to its port status could stand out as a bulwark in the global slump. They face a number of challenges in the coming months: inclusion in the FTSE Russell’s World Government Bond Index, an increase in the supply of bonds from local governments, and a narrowing of the yield gap between China and the US also threaten to make Chinese debt less attractive. China’s 10-year government bond yields are expected to rise to 3.5% by the end of this quarter, as China’s yield premium over government bonds eased for the first time last month, according to Becky Liu, head of China’s macro strategy at Standard Chartered Plc has reduced its holdings of Chinese government bonds since February 2019, a trend that is expected to continue for some time. The yield gap fell to 144.8 basis points on March 31, the narrowest since February 24, 2020 when it was 144.2 basis points. The dollar’s renewed strength, the narrowing yield gap and Beijing’s latest move to stimulate capital outflows have also had an impact. Analysts, including INGs, have been urged to lower their forecasts for the Chinese currency. After gaining nearly 7% against the dollar last year and further gains earlier this year, the yuan suffered its worst sell-off in a year last month and has seen steady gains since May of the year against the dollar as PBOC steps aside The slowdown in capital inflows also weighs on the yuan: Cross-border currency flows tracked by Goldman Sachs totaled $ 1.5 billion for the week ended April 7, compared to about $ 3 USD billion the previous week. “It’s about how views on the US dollar have changed quickly,” said Zhou Hao, an economist at Commerzbank AG. “People believe the US economy will rebound strongly in the next two years, and that’s exactly what stocks and bonds have priced in.” Zhou expects the yuan to weaken from around 6.56 on Friday to 6.83 per dollar by the end of this year. (Updates with the performance of broader equity and technology stocks in the ninth and tenth paragraphs) For more articles like this, visit bloomberg.com. 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