MNI China Money Week: China Stocks Underperform Yuan

--China Rates And Stock Correlation Unlikely To Remain Negative 

By Stuart Allsopp

     SINGAPORE (MNI) - Implied volatility remains elevated for many China assets

into September, with USDCNY 3-month vol and the Hang Seng VIX both ticking

higher this week, despite a quiet trading week both in terms of news flow and

price action.

     Rates, bonds and the yuan are all trading within the prior week's range and

equities are slightly lower. 

     Correlations between assets have begun to decline, with the 21-day rolling

correlation between the CSI 300 and CNHUSD falling back to just 0.09, reflecting

the recent underperformance of equities relative to the yuan. Correlations

between the yuan and rates have picked up, with the 21-day rolling figure

hitting 0.65 Friday. In contrast, the correlation between stocks and rates

turned negative for the first time in a month.

     It appears as though the increase in rate expectations is coming at the

expense of declining equity prices, and it could be argued that this makes sense

given that the high level of corporate sector indebtedness becomes more

expensive to service with higher interest rates. 

     However, this slight inverse correlation is not expected to continue.

     --HIGHER RATES A KEY

     Should interest rates continue to edge higher, it would likely reflect a

more prudent monetary policy stance by the People's Bank of China, and/or the

easing of trade tensions between China and the U.S. If higher rates result from

the former this should support the yuan and see expectations of economic

stability return, to the benefit of stocks. If higher rates result from an

improvement in trade tensions, this would likely benefit all assets, seeing

positive correlations return.

     It is also possible that the slight recovery in rates gives way and they

resume their downtrend, pressured by equities. Either way, it would be

surprising to see rates and equities continue to diverge in the current economic

environment.

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

[TOPICS: M$A$$$,M$Q$$$,M$$FI$,MN$FI$,MN$FX$]