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China asset-bubble warning threatens stock frenzy in Hong Kong

Easier liquidity helped send stocks in Hong Kong and mainland China surging in recent months.
Image: Billy H.C. Kwok/Bloomberg

A chill swept through financial markets in mainland China and Hong Kong on Tuesday after the central bank unexpectedly withdrew funds from the banking system amid warnings about growing froth.

Hong Kong’s Hang Seng Index slid 2% from its highest level since June 2018, led by a 5% plunge in Tencent Holdings Ltd. Futures on Chinese government bonds due in a decade were poised for the biggest decline since August, while the seven-day repurchase rate jumped 29 basis points to 2.72%, the highest level in a year.

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The People’s Bank of China withdrew a net 78 billion yuan ($12 billion) via open-market operations on Tuesday. PBOC advisor Ma Jun told local media risks of asset bubbles — such as in the stock or property market — will remain if China doesn’t shift its focus toward job growth and inflation management instead.

Easier liquidity helped send stocks in Hong Kong and mainland China surging in recent months. Mainland investors have bought a net HK$259 billion worth of Hong Kong stocks this year, almost 40% of last year’s total, helping to make the city’s equities the world’s best performers. The CSI 300 Index of shares in Shanghai and Shenzhen is near a record.

“The PBOC wants to bring investors out of the euphoria caused by abundant liquidity in December,” says Xing Zhaopeng, an economist at Australia & New Zealand Banking Group. “The PBOC is unlikely to loosen its purse strings at least this week, which will make cross-month liquidity very tight.”

PBOC Governor Yi Gang said the central bank will seek to support economic growth while limiting risks to the financial system — a continuation of its existing policy stance. Yi said China’s total debt-to-output ratio climbed to around 280% at the end of last year.

Tencent’s drop came after the stock surged 11% on Monday, its best day since 2011, to approach a trillion-dollar market value.

© 2021 Bloomberg

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