(Bloomberg) – A massive sell-off in Chinese stocks spilled over into bond and currency markets on Tuesday as unverified rumors circulated that US funds were offloading assets from China and Hong Kong.
The speculation, which included talks that the United States might restrict investment in China and Hong Kong, sparked a wave of late-afternoon sales by traders in Asia who had previously thrown stocks in the Peking’s regulatory crackdown. The Hang Seng Tech index plunged as much as 10% in Hong Kong, the yuan fell to its lowest since April against the dollar and Chinese bonds fell.
Read more: Crackdown in China upsets investors, with losses on Chinese tech and education stocks now exceeding $ 1 trillion since February.
The spectacular moves highlighted just how fragile investor confidence has become after a months-long regulatory attack by Beijing that appears to be only getting worse. Traders fear the latest crackdown on the country’s education, food delivery and real estate sectors will spread to other sectors such as healthcare, as China seeks to tighten its hold on big technology and reduce the wealth gap.
“The spread of declines from the Chinese equity space to the yuan signals that concerns about regulatory risk in China may have escalated,” said Terence Wu, foreign exchange strategist at Oversea-Chinese Banking Corp. in Singapore.
Treasuries climbed along with the greenback and the yen as investors sought safe havens. The yield on China’s most actively traded 10-year government bonds rose seven basis points to 2.94%, the highest in a year. The offshore yuan fell 0.6% to 6.52 per dollar, and month-on-month volatility in the currency pair was the largest increase since May.
“Although we cannot verify whether this is true or not, the market is worried that foreign capital will come out of the Chinese stock and bond market on a large scale, so sentiment is badly hurt,” Li Kunkun, a trader from Guoyuan Securities. Co. spoke of the rumors that circulated among traders at the end of the Asian day.
The massive sell-off also spilled over into the Chinese offshore credit market. High yield bonds fell as much as 5 cents on the dollar, while investment grade bond spreads widened by 10 to 15 basis points.
Investors in some of China’s most dynamic sectors – from tech to education – have found themselves in the crosshairs this month as Beijing tries to curb private companies it accuses of exacerbating inequality , increase financial risks and challenge the authority of government. The apparent acceptance by policymakers of the short-term pain for shareholders in pursuit of China’s long-term socialist goals has been a wake-up call for investors.
READ: Traders seek winners as growing Chinese crackdown stuns markets
“The main concern now is whether regulators will do more and extend the crackdown to other sectors,” said Daniel So, strategist at CMB International Securities Ltd. “Regulatory concerns will be the main market overhang for the second half of the year.”
He therefore added that it was too early in his opinion for investors to “fish the bottom”.
Tech and education stocks fell further on Tuesday while real estate stocks also fell. Tencent Holdings Ltd. fell 9%, most in about a decade, after the company’s music arm gave up exclusive streaming rights and was fined. Its social media platform WeChat has stopped taking new users because it is undergoing a “technical security upgrade” in accordance with applicable laws and regulations. Meituan fell 18%, its biggest drop on record, as investors digested the new rules on online food platforms.
The turnover of the main board of directors of Hong Kong stocks reached an all-time high of HK $ 361 billion ($ 46 billion). The Hang Seng Index slipped 4.2%, bringing its two-day loss to 8.2%, the highest since the global financial crisis.
Shares fell in a “panic sell” on Monday after regulators on Saturday issued reforms that will fundamentally change the business model of private companies teaching the curriculum. Major Hong Kong retail brokers cut margin funding for struggling Chinese education stocks as investors suffered heavy losses.
“There is no anchor for us to justify stock valuations now given regulatory uncertainties,” said Dai Ming, a Shanghai-based fund manager at Huichen Asset Management. “In the past, the market expected normal regulations on certain sectors, but now it appears that the government can even tolerate killing an entire industry or certain top companies when necessary.”
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