China Equity Rout Deepens as Traders Rush to Sell Before Holiday

(Bloomberg) — Chinese stocks in Hong Kong plunged as a weakening currency, disappointing earnings and worries over the US debt-ceiling deadlock saw traders trim positions ahead of a long weekend.

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The Hang Seng China Enterprises Index closed 2.2% lower on Thursday, capping its worst seek since March before markets close Friday for a holiday. XPeng Inc. fell the most following an earnings miss. The gauge has fallen more than 18% since this year’s high and has erased about half of its gains seen during the strong China reopening rally between November and January.

“We are seeing a bit of a capitulation,” said Marvin Chen, a Bloomberg Intelligence strategist. “Investors may be rotating away from China to other tech heavy markets such as Korea and Taiwan which have tailwinds from AI demand.”

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The intensifying selloff in Chinese stocks suggests investors are losing hopes of a rebound. Evidence is building that the economy’s recovery is sputtering, the property market remains in a dire state, and few believe the US-China tensions will have an easy way out. The yuan’s weakness has dealt another blow with foreign outflows from mainland stocks accelerating.

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Overseas funds were net sellers of onshore stocks for a third straight day on Thursday, offloading more than $3 billion during the period. The CSI 300 benchmark of mainland shares fell 0.2% after erasing all its gains for the year on Wednesday. Hong Kong’s benchmark Hang Seng Index slid 1.9%, while a Bloomberg Intelligence gauge of builders’ shares was down for a 12th day in its longest run of losses since 2016.

“Sentiment is extremely weak, driven by the dual effect of the depreciating yuan and a loss of hope for the property sector,” said Wang Mingli, executive director at Shanghai Youpu Investment Co. “Funds are starting to lose their calm as northbound selling continues, and it looks like its going to be a tough period for the economy.”

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An investor favorite until just a few months back, Chinese shares are now among the year’s worst performers in Asia. Key gauges for Hong Kong and mainland stocks are in the red compared to double digit gains in South Korea, Taiwan and Japan.

“With regards to mainland China exposure, it is back to where we were in October 2022,” HSBC Holdings Plc strategists including Herald van der Linde wrote in a note. “Global funds remain significantly underweight mainland China and Asia funds now move to a small underweight as well.”

Sentiment also worsened as the US debt-ceiling negotiations hit a fresh impasse. Negotiators were far apart on key issues, especially the spending cuts demanded by Republicans, spurring risk-off sentiment.

“The weakness in Hong Kong stocks recently is mainly due to worries over the US debt ceiling,” said Hayman Chiu, an analyst at Cinda International Holdings. “The market has been correcting from the second quarter following disappointing economic data and the US debt ceiling negotiations would be key to watch.”

–With assistance from April Ma, Mengchen Lu, Ishika Mookerjee and Xiao Zibang.

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