Business

China 'catch-up' sell-off expected after Lunar New Year holiday ends

Markets are bracing for a "catch-up" sell-off by Chinese traders as the world's second-largest economy resumes trading on Monday.

A week's break for Chinese Lunar New Year could have been a week of reprieve for financial markets, which have been speculating wildly on Chinese currency devaluation and demand.

Instead, last week saw savage sell-offs in global banking stocks, and continued volatility.

Asian shares performed miserably and this risk-off sentiment is likely to channel through to Chinese markets, says research by Credit Suisse.

The Nikkei 225 slumped 11 per cent last week, and Hong Kong's Hang Seng Index (tightly correlated to the mainland's movements) reopened after a three-day New Year break down 3.85 per cent. CSI300 futures are pointing to a drop of 20 points.

"Under such a turbulent environment, combined with the Chinese stock market's own plunges in January, Monday's reopening may bring in heavy volatility to Chinese stocks," said Renee Mu, currency analyst at DailyFX.

Advertisement

Aussie stocks are set to open higher after the rally in US and European stocks on Friday, led by financials and miners. But with such large declines globally over the week, a rocky start to Chinese trading could put pressure on Australian stocks.

"Given the Australian market is predominantly banks and miners, expect a strong open locally," said Matt Felsman, private wealth adviser at APP Securities.

"However, with such declines globally last week, we wait as China may need to play "catch-up", which could dampen our enthusiasm."

Yuan strength questioned

During the holiday week, the Chinese offshore yuan performed well, strengthening 0.51 per cent against the US dollar due to a smaller than expected drop in China's foreign currency reserves, combined with US Federal Reserve boss Janet Yellen's testimony that negative interest rates are not out of the question.

But Heng Koon How, senior currency strategist with Credit Suisse, thinks investor sentiment will remain negative towards the world's second-largest economy.

"We think this offshore yuan strength is overdone; Chinese mainland equities will likely see a heavy correction lower when the market reopens on Monday and that will lead to offshore yuan weakness," Mr Heng said.

"In addition, the latest $US99.5 billion contraction in China's foreign reserves for January will likely keep global investors concerned over ongoing capital outflows from China. We reiterate our negative view of both the offshore yuan and onshore yuan and see a return in weakness next week."

With US and Canadian markets closed on Monday for a national holiday, Japanese GDP and industrial production figures will dominate the news cycle. Analysts expect fourth-quarter Japanese GDP estimates to show a quarter-on-quarter growth rate of -0.3 per cent. Investors will also be keenly watching Chinese trade figures for January, released on Tuesday, for evidence the decline in exports and imports may be moderating.

However Kathy Lien, managing director fo FX strategy at BK Asset Management, said Chinese authorities could help smooth market jitters. 

"The government could help shore up confidence by tweaking the data to show less weakness or more strength," she said in a note. 

Advertisement