The Chinese and U.S. stock markets are going in opposite directions.
An intensifying crackdown against leverage in Asia’s biggest economy has rocked the hither-to unflappable Shanghai Composite Index over the past week, sending it to a three-month low last session. In the U.S., the largest equity market is embracing a risk rally spurred by the French election, with the S&P 500 Index continuing to build on reflation-trade gains ignited by Donald Trump’s November victory.
The divergence means the two markets are the least in tune since August 2008 -- just before the collapse of Lehman Brothers Holdings Inc. unleashed chaos on the global financial system.
Chinese officials have mainly kept mainland stocks on a tight rein after routs in mid-2015 and the start of 2016 reverberated through world financial markets. Until Monday’s 1.4 percent slump, the Shanghai Composite Index hadn’t fallen more than 1 percent for 86 trading days.
As Beijing’s focus on reducing risk in the financial system shifted from money-market tightening and reducing leverage to containing speculation and irregular trading, the two markets starting moving in opposite directions in the past month.
The latest step by officials is targeted at entrusted investments -- read more about the deleveraging efforts here.
In one sense, it’s a sign that investors overseas aren’t as worried about Chinese market ructions as they were in previous years -- perhaps partly thanks to underlying strength in China’s economy. Given how mainland stocks have become increasingly linked to global markets, however, the divergence may prove to be a short-term phenomenon, according to Daniel So, a strategist at CMB International Securities Ltd. in Hong Kong.
“The Chinese government is squeezing speculation out of the market and while investors adjust, it will inevitably lag behind other parts of the world," So said.
For now, the split with the U.S. is particularly marked, with the Shanghai Composite’s 30-day correlation with the Bank of New York Mellon index of Chinese American depository receipts approaching zero. The Chinese ADR market -- dominated by technology companies like Alibaba Group Holding Ltd. -- has climbed 8.6 percent since Trump was elected U.S. president, while the state-company-led Shanghai Composite is down 0.6 percent.
China’s deleveraging drive and the renewed focus on market irregularities have put the mainland share market into a “bad mood,” but officials aren’t likely to tolerate a lot of instability ahead of the Communist Party’s twice-a-decade leadership reshuffle later this year, said George Magnus, a former adviser to UBS Group AG and current associate at the University of Oxford’s China Centre.