(Bloomberg) -- Bond prices in China are increasingly being influenced by stock market flows, with a rush from fixed-income to equities pushing the correlation between the two markets to its most extreme level in over four years.
The 30-day correlation between the Shanghai Stock Exchange Composite Index and the Bloomberg China Treasury Total Return Index hit its most negative level since 2020 in October, and remains well below its average for this year, shows data compiled by Bloomberg. The bond index gained less than 0.1% last month, its worst performance since September 2023.
“An increasing number of traders are watching stocks to decide how to trade bonds,” said Lv Pin, chief fixed-income analyst at Topsperity Securities, a Chinese brokerage. “Recently the correlation got so close that the linkage in the two assets’ moves could be even down to minutes, which is rare.”
The differing fortunes of China’s bond and stock markets show how rapidly investor sentiment has shifted in the wake of a stimulus blitz that started in late September. Just two months ago, the central bank was worried about too much money going into bonds, as stocks lagged and investors fretted about the economy. But the Shanghai index has surged more than 20% from a September low, while bonds have suffered bouts of selling pressure.
The rotation from bonds to stocks in the wake of the stimulus push added to pressure on Chinese wealth management products, which invest heavily in fixed income. The balance of these products shrank by 1.05 trillion yuan ($149 billion) in two weeks through early October, according to Bloomberg calculations based on data from Puyi Standard, a consultancy firm that tracks China’s asset and wealth management industry. China has asked big banks to step up their monitoring of these products, Bloomberg reported.
Flows in and out of some of China’s most liquid government bond ETFs have sometimes mirrored the performance of stocks in the wake of the policy pivot, Bloomberg-compiled data shows. Redemptions from exchange traded products that hold Chinese bonds surged during the initial rally, with money flowing back into these funds during periods when stocks lost momentum.
While China’s stock market surge has faltered in recent weeks amid uncertainties about Beijing’s policy follow-ups and the countdown to the US election, investors remain much more active than usual. The 30-day volatility of the Shanghai Composite Index is around its highest level in over eight years, according to data compiled by Bloomberg.
Turnover on the Shanghai and Shenzhen stock exchanges has been at a daily average of about 1.9 trillion yuan in the past two weeks, around three times that of the months before the policy blitz.
Small investors in China have become more bullish on the stock market and may be selling or redeeming their time deposits, money market funds or bond funds in order to free up cash to participate in potential stock rallies, Qin Han, analyst at Zheshang Securities, wrote in a note.
Any weakness in bonds or gains in stocks may amplify the “seesaw effect” between the assets, he added.
©2024 Bloomberg L.P.