Bond rout puts good times in check

Editorial | Mary Ma 24 Nov 2017

To paraphrase Charles Dickens - it's the best of times, it's the worst of times.

Only two days ago, the Hang Seng Index conquered the summit to reach a 52-week high above the 30,000-point level. The triumphant flag flew for two days before the index retreated back below 30,000, thanks to a retreat by A shares in the mainland.

The HSI lost 400 points briefly before recovering some losses by the time the market closed yesterday at 29,707.94.

It may be tempting to call for caution. But it would be hard to find an audience when it's reckoned to be the best of times by so many people. Tycoon "Uncle Four" Lee Shau-kee was the first one to project the HSI to pass the 30,000 mark, but the prediction was made years ago.

The HSI opened the year at 22,150. The surge, nonetheless, has been fractional, primarily spurred by big stuff such as mainland tech giant Tencent. The pattern replicates Wall Street, where the record-setting curve has been led by high-value tech stocks.

Stocks associated with the old economy are left trailing way back. HSBC Holdings, for example, still languishes below the stellar heights it set in the past.

Yesterday's correction may appear to be minor, but could be fundamental, principally due to agitation in the mainland A-share markets. The Shanghai Stock Exchange Composite Index fell 2.3 percent, while the CSI 300 that reflects the performance of the top 300 stocks in Shanghai and Shenzhen tumbled nearly 3 percent.

Not much has been said by local analysts about the relevant bond markets in the mainland - even though it may be the worst of times for the bond markets there. It would be a gross oversight to keep the bond situation off the monitor.

According to CNBC, the People's Bank of China has been pumping an astronomical amount of cash into the financial systems to stabilize the bond sector in recent weeks, as representative 10-year sovereign bond yields edged toward new highs in as many years.

Yields are the amount of interest payable. So, the greater the demand for the bonds, the lower the yields will be. Reversely, a high yield - such as 4 percent, which is considered to be alarming - points to weak appetite for financial instruments.

The rise in bond yields shows capital has been flowing away from the mainland bond market heading for other destinations - including Hong Kong stocks - which may explain the dramatic growth in trading volume over the past few days.

Could capital be fleeing the mainland in droves after the "victorious" conclusion of the Chinese Communist Party's 19th congress?

CNBC reported the central bank injected US$130 billion (HK$1.01 trillion) into its markets in the last two weeks to stem a bond rout. Despite the intervention, yields have remained at high levels, which, to some extent, indicates the weapon of intervention could be losing its efficacy in light of the scale of the capital exodus.

If the situation persists in the mainland, it would no longer be scaremongering to predict that the best of times will go into reverse sooner than expected.

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