The Hang Seng China Enterprises Index closed down 3.4% Thursday, with banks among the biggest drags as they traded ex-dividend. Both China Construction Bank Corp. and Industrial & Commercial Bank of China Ltd. dropped more than 3%. 

The selloff extended the declines on Wednesday, when a key indicator showed a slowdown in China’s services industry, adding to worries about a patchy economic recovery and disappointment with Beijing’s hesitance in rolling out stronger support measures. 

Sentiment weakened further after Bloomberg News reported that Chinese lenders have stopped buying a special type of bond mostly sold by the nation’s debt-laden local government financing vehicles. While the move may disrupt financing plans for some LGFVs, the long-term impact on their access to funding is unclear.

“There are several reasons for the losses today, including short-sell ratio reaching a record high, weakening RMB and the slower-than-expected China economic recovery,” said Sonija Li, head of retail research at MIB Securities. “Till now, there have been no game-changer policies, resulting in market disappointment.”

Eoin Treacy's view

The banks going ex-div contributed to the decline today but that is not the cause of the broader downtrend. The big question for Chinese stocks remains the willingness of the government to support asset prices with stimulus. Without that, the risk of deflation is nontrivial.

The China Enterprise Index (H-Shares) remains in a relatively consistent downtrend. That is unlikely to change until either the Chinese government provides stimulus or the trend of interest rates reverses in the USA.

Chinese 10-year government yields are back testing the lows of the last decade. A clear upward dynamic will be required to check the potential for additional downside.