Financial Services

REFILE-With Sino-U.S. ties strained, China share slump seen deepening

(Refiles to remove repeated word in third last paragraph)

* SSEC -0.6 pct, CSI300 -0.8 pct, HSI flat

* Analysts, investors look to trade breakthrough at G20

* Slowing economy, sour Sino-U.S. ties weigh on long term prospects

By Andrew Galbraith and Samuel Shen

SHANGHAI, Nov 22 (Reuters) – China’s main stock indexes fell on Thursday, extending a lengthy slump tied to the fractious trade war between the world’s two largest economies, and few analysts expect either the dispute or market weakness to end any time soon.

Analysts say China’s financial markets are likely to level off in the near term as caution grows ahead of high-stakes talks between Chinese President Xi Jinping and his U.S. counterpart Donald Trump at a G20 meeting in Argentina on Nov. 30.

But while any progress in dialling down the trade war heat would likely boost China’s financial markets, the sugar rush is expected to quickly fade, with markets left to focus on China’s slowing economy and the likelihood that Sino-U.S. ties will remain strained.

“Market confidence is highly related to the Sino-U.S. trade frictions … A genuine bottoming out of the capital markets in the short term depends on whether a deal can be reached” at the G20 meeting, said Cao Yuanzheng, chief economist at Bank of China International.

Investors are not optimistic, but are leaving room for surprises.

“Mr. Trump is unpredictable,” said Lin Lu, a professional investor in Shanghai. “You never know when he’ll do an about-face.”

Even in the case of a deal, however, longer-term prospects are “not very sanguine, if the U.S. treats China as a strategic rival,” Cao said.

Moreover, “internally, China still faces heavy economic downward pressure,” he added.

Those pressures weighed on the Shanghai Composite index on Thursday, pulling it down 0.6 percent by midday. The index has tumbled more than 20 percent so far this year.

The blue-chip CSI300 index was down 0.8 percent, pulled down by financial and real estate firms that have risen in recent sessions on hopes that official growth boosting measures will cushion the impact of the trade war and slowing economic growth.

In Hong Kong, the Hang Seng index was flat, and the China Enterprises Index was down 0.72 percent.

Still, stimulus will take some time to kick in, and many analysts believe business conditions will get worse before they get better.

Further policy easing also could create pressures of its own.

Recent weak data have sparked speculation that China’s central bank could resort to a rare cut in the country’s benchmark interest rate to jumpstart growth, which was cooling even before the trade dispute escalated.

That could put significant pressure on China’s yuan, particularly at a time when the U.S. central bank is continuing to raise rates, and add to worries about high corporate and household debt.

“In addition to the trade war element, the Fed will likely raise rates three times next year,” said Jiang Mingde, chief consultant at Shanghai Yixin Weiye Investment Management Co.

“China’s economy is on a downward slope. GDP growth was only 6.5 percent in Q3. Next year, GDP will take a step down but we don’t know by how much.”

Oxford Economics forecasts 2019 growth could cool to 6 percent, the weakest annual expansion on record, if the U.S. proceeds with a sharp hike in tariffs on Chinese goods from Jan. 1 and China retaliates.

Rising U.S. and falling Chinese rates have already pushed the yield on thinly traded one-year Chinese government bonds below that of their U.S. counterparts.

On Thursday, they yielded 2.63 percent, 3.9 basis points lower than one-year U.S. bills, at 2.669 percent. Spreads on benchmark 10-year bonds have also narrowed to around 30 basis points from 150 basis points at end-2017, according to Refinitiv Eikon data.

The yuan weakened slightly on Thursday and was trading at 6.9310 per dollar at 0400 GMT.

Reporting by Andrew Galbraith and Samuel Shen; Editing by Kim


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