Everywhere you look in China there are signs of more misery in the market

(Bloomberg) — Things are going from bad to worse for Chinese stocks, with a bear market on the horizon as disappointing manufacturing data adds to the bleak outlook.

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The Hang Seng Index and a gauge of Chinese stocks in Hong Kong fell about 20% from their recent peak, while the offshore yuan fell to a six-month low. Commodities, from copper to iron ore, also fell.

Global funds are retreating precipitously as a slew of disappointing data, geopolitical risks and continued weakness in the real estate sector hurt confidence. Calls for more political support are mounting, and worries about a faltering Chinese economy are reverberating around the world.

“Weakness has been expected for months now, so the data is just another reason why the market is dragging its feet,” said Yang Zhiyong, executive director of Beijing Gemchart Asset Management Co. support for the economy earlier in the year, but none of that materialized, which is most frustrating for me.

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Hong Kong’s benchmark Hang Seng Index fell 2.5%, while the Hang Seng China Enterprises Index fell 2.6%. Both gauges were on track to post their biggest monthly declines since February, having lost more than 8% so far.

Pessimism is omnipresent. Only 16% of HSCEI members have traded above their average price in the past 50 days, down from 58% in mid-April. The index was Asia’s worst performer on Wednesday.

The onshore CSI 300 index, which erased all its gains for 2023 days earlier, fell another 1.2% on Wednesday.

The decline in stocks may have surprised some traders, who had already priced in further weakness given the recent run of lackluster data.

“The data will surely have a negative impact on the market, but it’s not entirely surprising and the market has already priced in some of the weakness,” said Yan Kaiwen, analyst at China Fortune Securities. “But room for another slide will be limited.”

Get out now

Global funds are not waiting to find out for sure. They are on track to become net sellers of Chinese equities for a second straight month, something that hasn’t happened since the October rout. Some Chinese bulls, including Citigroup Inc. and Jefferies Financial Group Inc., have started to retreat, reducing portfolio allocations.

Overseas investors had sold 4.6 billion yuan ($647 million) of mainland stocks through business links with Hong Kong by the midday lunch break.

“The reopening of trade is over and now you can really feel the divergence,” said Patrick Wu, co-head of trade for Asia-Pacific and the Middle East at Credit Agricole CIB. “Global traders won’t be going ashore to buy assets en masse now.”

Moreover, the depreciation of the Chinese currency provides investors with another excuse to head for the exit. The offshore yuan fell to a six-month low of 7.1198 to the dollar on Wednesday. The yield on Chinese 10-year government bonds was little changed at 2.71%.

Bad data

In the absence of estimates from the official PMI for the manufacturing sector, traders sold industrial metals. Copper extended its worst monthly loss in nearly a year and iron ore fell further below $100 a tonne.

Even before Wednesday’s data, economists had asked China’s central bank to cut the reserve requirement ratio for big banks before the end of the third quarter.

To make matters worse, there is no sign of easing tensions between Washington and Beijing. The United States has accused China of an “unnecessarily aggressive maneuver” after a Chinese fighter jet swerved past a US reconnaissance plane over the South China Sea. Beijing also recently declined a request from Washington for the countries’ defense chiefs to meet this week.

“China’s uneven economic recovery is one of the concerns of investors, along with geopolitics,” said Vey-Sern Ling, chief executive of Union Bancaire Privée. “More government stimulus can help, but evidence of long-term sustainable growth will be needed to dispel investor doubts.”

–With help from Tian Chen, Jeanny Yu and April Ma.

(Updates throughout)

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