China could face a short term sell off caused by China’s deleveraging campaign with the renewed squeeze of the shadow banking sector implemented following the Party Congress in October. It has caused the 10-year renminbi government bond yield rising to 3.93% on Wednesday. The aim is to squeeze out shadowy loans and encourage more loan growth to the real economy. China Securities Regulatory Commission (CSRC) recently suspended approval of new mutual funds that plan to allocate more than 80% of their portfolio to Hong Kong-listed equities. It could result in a short term cooling of South Bound fund inflows, further aggravating by the normal seasonal decline in A share trading volume in the run up to Chinese New Year in 16 February.
Indeed that growth scare has already begun, The Caixin/Markit manufacturing Purchasing Managers' Index came in at 50.8 for last month — the lowest level in five months Economists in a Reuters poll had expected the index to read 50.9 for November, lower than 51.0 the previous month.
On 27 Nov, this blog predicted that the Shanghai A Index has peaked and is due for a sharp correction just from a technical perspective . Indeed the Shanghai Stock Exchange A Index (SSE A) underperforming the MSCI Asia Index and trading at a 5 month low. The SSE A index has broke its uptrend channel line, with immediate support at 3445 , its is likely to trend lower in the near term towards 3355 and it will drag the Hang Seng lower.
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